Telecommunications Equipment

USITC Publication 2820 October 1994

OFFICE OF INDUSTRIES U.S. International Trade Commission Washington, DC 20436 UNITED STATES INTERNATIONAL TRADE COMMISSION

COMMISSIONERS

Peter S. Watson, Chairman Janet A. Nuzum, Vice Chairman David B. Rohr Don E. Newquist Carol T. Crawford Lynn M. Bragg

Robert A. Rogowsky Director of Operations

Vern Simpson Director of Industries

This report was prepared principally by

Lori Hylton Brown

Electronic Technology and Equipment Branch Services and Electronics Division

Address all communications to Secretary to the Commission United States International Trade Commission Washington, DC 20436 PREFACE

In 1991 the United States International Trade Commission initiated its current Industry and Trade Summary series of informational reports on the thousands of products imported into and exported from the United States. Each summary addresses a different commodity/industry area and contains information on product uses, U.S. and foreign producers, and customs treatment. Also included is an analysis of the basic factors affecting trends in consumption, production, and trade of the commodity, as well as those bearing on the competitiveness of U.S. industries in domestic and foreign markets. 1 This report on equipment covers the period 1989 through 1993 and represents one of approximately 250 to 300 individual reports to be produced in this series during the first half of the 1990s. Listed below are the individual summary reports published to date on the electronic equipment and technology sector.

USITC publication Publication number date Title 2445 January 1992 ...... Television receivers and video monitors 2648 July 1993 ...... Measuring, testing, controlling, and analyzing instruments 2674 September 1993 ...... Medical goods 2708 December 1993 ...... 2728 February 1994 ...... Capacitors 2730 February 1994 ...... Navigational and surveying instruments 2820 October 1994 ...... Telecommunications equipment 2821 October 1994 ...... Computers, components, and peripherals 2822 Ocotber 1994 ...... Audio and video recording and reproducing equipment

1 The information and analysis provided in this report are for the purpose of this report only. Nothing in this report should be construed to indicate how the Commission would find in an investiga­ tion conducted under statutory authority covering the same or similar subject matter.

CONTENTS

Page Preface ...... Introduction ...... 1 U.S. industry profile ...... 3 Industry structure ...... 3 Types of companies...... 5 Research and development expenditures ...... 6 Distribution ...... 6 Employment, industry automation, and manufacturing locations ...... 7 Globalization ...... 8 Regulations and standards affecting the industry ...... 8 Consumer characteristics and factors affecting demand ...... 10 Foreign industry profile ...... 11 Canada...... 11 Western Europe...... 12 ...... 14 Other Asian countries ...... 14 U.S. trade measures ...... 15 Tariff measures ...... 15 Nontariff measures ...... 15 U.S. government trade-related investigations ...... 19 Foreign trade measures ...... 19 Tariff measures ...... 19 Nontariff measures ...... 21 European Union ...... 21 Korea ...... 22 Japan...... 22 U.S. market ...... 23 Consumption ...... 23 Production ...... , ...... 23 Imports ...... 25 Foreign markets ...... 26 Foreign market profile ...... 26 Western Europe ...... 26 Canada ...... 28 Japan...... 28 Central Europe and the Former Soviet Union ...... 29 China and East Asia ...... 30 Mexico and other Latin American Countries ...... 30 U.S. exports ...... 31 U.S. trade balance 31 Appendixes A. Tariff and trade agreement terms ...... A-1 B. United States International Trade Commission Title VII investigations related to telecommunications equipment ...... B-1 C. Glossary of terms ...... C-1

iii CONTENTS-Continued

Page Figures I. Telecommunications equipment industry ...... 2 2. Selected U.S. frrms in the telecommunications equipment industry ...... 5 3. Selected information technology industries: R&D spending as a percent of sales, 1989-92 . . . . 6 4. Telecommunications equipment: Trends in employment and productivity, 1987-94 ...... 7 5. Telecommunications equipment: Top 15 major producers and global communications revenues, 1992 ...... 12 6. Telecommunications equipment: U.S. shipments by product type, 1992 ...... 25 7. Telecommunications equipment: Top 10 U.S. export markets, 1993 ...... 32 8. Telecommunications equipment: U.S. exports and imports, 1989-93 ...... 32 9. Telecommunications network equipment: Selected U.S. exports and imports, 1993 ...... 34 10. Telecommunications customer premises equipment: Selected U.S. exports and imports, 1993 ...... 34 Tables I. Examples of emerging technologies, services, and equipment ...... 4 2. Telecommunications equipment: International production trends, 1990-93 ...... 11 3. Telecommunications equipment: Harmonized tariff schedule subheading; description; U.S. col. 1 rate of duty as of Jan. 1, 1994; U.S. exports, 1993; and U.S. imports, 1993 ...... 16 4. U.S. International Trade Commission investigations related to the telecommunications industry ...... 20 5. Telecommunications equipment: U.S. producers' shipments, exports of domestic merchandise, imports for consumption, and apparent consumption, 1989-93 ...... • . 23 6. Telecommunications equipment: Selected U.S. product markets, 1989-97 ...... 24 7. Telecommunications equipment: U.S. imports for consumption, by principal sources, 1989-93 ...... 26 8. Telecommunications equipment: International markets for selected products, 1990-96 ...... 27 9. Asia: Main line penetration per 100 inhabitants, 1992 ...... 30 10. Telecommunications equipment: U.S. exports of domestic merchandise, for consumption, and merchandise trade balance, by selected countries and country groups, 1989-93 ...... 33

IV INTRODUCTION switches with digital switches in anticipation of new technologies and services. Cellular switches are similar The global telecommunications equipment industry in construction to CO switches, but rely on more is undergoing significant transformation as regulatory advanced software to perform additional functions, authorities liberalize restrictions, governments such as locating units and determining privatize domestic service providers, equipment whether they are operable. manufacturers introduce new technologies, and carriers offer new services. This report examines developments The United States is a net exporter of network in the $127 billion 1 worldwide telecommunications equipment, maintaining large trade surpluses in equipment industry during the 1990s, with reference to switches, satellites, and fiber optics.3 Primary developments in the telecommunications service purchasers of network equipment are common carriers, industry as appropriate. The report covers independent service providers, and companies with developments in both the U.S. and foreign private communications networks. telecommunications equipment industries and major telecommunications equipment markets. The foreign Customer premises equipment encompasses a industries covered include those in Japan, Canada, and variety of products that are connected to the Western Europe. The report also addresses tariff and communications network. CPE includes terminal nontariff issues affecting trade in these products. equipment, which initiates and receives signals transported over the network, as well as some The telecommunications equipment industry can switching apparatus. Products included in this category be divided into two functional sectors: (1) network or are telephone sets (both wireline and ), key carrier equipment, and (2) customer premises systems, private branch exchanges (PBXs), and equipment (CPE), as shown in figure 1. Network modems. More recently, products such as facsimile equipment can be subdivided into transmission () machines, answering machines, and voice equipment and switching equipment. Figure 1 also response and voice messaging systems have been distinguishes between equipment that is joined to the included in this category. The United States imports the traditional wireline networks, and that which is joined majority of its customer premises equipment, to the newer wireless (or mobile) networks. For the maintaining a trade deficit in PBXS', answering purposes of this report, transmission equipment is machines, fax machines, and cellular and cordless defined as any product used to transport a signal. For handsets.4 While businesses are the primary wireline networks, transmission equipment includes purchasers of CPE, individual consumers are copper wire, coaxial cables, fiber optic cables, increasingly buying modems, answering machines, and repeaters, and multiplexers.2 The wireline cellular phones to increase their personal and telecommunications industry has been upgrading its professional accessibility. This trend is growing as transmission equipment from copper wire to fiber optic telecommuting from remote offices becomes more cable over recent years, thus making fiber optics the popular. fastest growing segment of the network equipment market. For wireless networks, transmission equipment U.S. manufacturers are particularly competitive in includes microwave radio equipment, radio base the high-end segments of the industry, such as station equipment, and satellites. transmission· and switching equipment. They are also competitive in high-end CPE products, such as voice Switching equipment completes connections processing systems. The manufacturing process for between callers by routing signals, such as a telephone these types of products is capital-intensive, demanding number, through the network transmission system to high levels of skill and sophisticated software input. the receiver. This segment of the equipment market has On the other hand, the manufacture of most low-end undergone rapid change in recent years. Central office customer premises equipment (e.g., telephone handsets (CO) switches, the largest segment of the network and answering machines) has moved overseas. equipment market, have evolved from Following the route of consumer electronics products, electromechanical switches to primarily electronic the manufacture of low-end CPE has shifted primarily switches. Many carriers currently are replacing analog to countries with lower production costs. These products are more labor intensive and are assembled 1 Based on revenues of the top 50 global communications equipment suppliers. Robert Preston, using commodity electronic components. "Product, Geographic Diversity Evident in Manufacturer Ranking," Communications Week International, Sept. 20, 3 Data compiled from official statistics of the U.S'. 1993, p. 23. Department of Commerce. 2 See Appendix C for a glossary of selected technical 4 Data compiled from official statistics of the U.S. terms used in this report. Department of Commerce. N Figure 1 TELECOMMUNICATIONS EQUIPMENT INDUSTRY

Wlrellne and Mobile Equipment I

Network/Carrier Equipment Customer Premises Equipment (CPE)

ii Transmission Equipment I rl Switching Equipment I Wlrellne Equipment Handsets Telephone sets Wlrellne Equipment Wlrellne Equipment '-- Key systems Central office switches Private Branch Exchanges (PBX) >-- >--- Copper cable Packet switches Modems Fiber optic cable switches Cordless phones Repeaters Fax machines Multiplexers Answering machines Voice response machines

Mobile Equipment Mobile Equipment Mobile Equipment Mobile telephone switches Base station equipment ·- Cellular phones Microwave switches ,__ Satellites - Microwave radio equipment Personal communication phones

Source: USITC staff. Two significant trends are influencing the 1984, AT&T was the principal supplier of U.S. local evolution of the telecommunications equipment and long distance telephone services. Early regulation industry. First, demand for new and better services is of the telecommunications industry protected the fueling purchases of advanced telecommunications vertically integrated Bell System from competition. hardware and equipment. The private and public AT&T and the local Bell telephone companies, the sectors are becoming increasingly aware of the largest purchasers of network equipment, bought most competitive advantage imparted by efficient of their equipment from Western Electric, an AT&T communications infrastructure. Businesses, in an effort subsidiary. Likewise, independent phone company to increase productivity through technology, are GTE also had a captive manufacturing unit Some turning to videoconferencing, on-line information industry experts have asserted that this system services, and enhanced mobile communications. Table prevented competition, slowed innovation, and inflated 1 lists a few of the many technologies and products equipment prices.6 emerging in response to more demanding consumers. Some products improve the speed and quality of The Carterfone decision by the Federal transmission. For example, fiber optic cable and Communications Commission (FCC) in 1968 is asynchronous transfer mode (ATM) switching will generally regarded as the first step toward opening the move data and voice signals rapidly and equipment industry to competition.7 This decision simultaneously across the network. Other products are allowed customers to connect non-telephone company designed with new services in mind. For example, equipment to the network, thus opening the customer personal communications services (PCS) will require premises equipment market to competition from light-weight portable handsets. These new services are non-AT&T manufacturers. 8 The most significant in various stages of deployment, with equipment action opening the industry was the Modified Final Judgment (MFJ) in 1984, which called for the manufacturers carefully gauging commercial viability. divestiture of AT&T's local operating companies.9 The second major trend affecting the This engendered a new wave of competition in the telecommunications equipment industry is the long-distance market. Five new nation-wide changing regulatory environment. In more open companies, including MCI and Sprint, initiated or markets, such as the United States, competitive access expanded their long-distance infrastructures; this, in providers (CAPs) and cable companies are being tum, increased the market for network equipment allowed to move into sectors once reserved for a single suppliers. Similarly, the seven newly-created Regional carrier; this phenomenon creates new sales Bell holding companies (RHCs) that emerged from opportunities for equipment manufacturers. Globally, divestiture also expanded networks. Because the RHCs countries are privatizing domestic wireline carriers and were no longer obligated to purchase equipment from licensing new cellular carriers, thus allowing foreign AT&T, the opportunities for new suppliers of equipment manufacturers to challenge traditional telecommunications equipment increased significantly. domestic supplier relationships. This trend is likely to Today, the RHCs purchase approximately half their continue as governments see competition and network equipment from companies other than privatization as means to upgrade national AT&T.IO In 1993, U.S. manufacturers' shipments of infrastructures and stimulate investment.5 telecommunications equipment reached $35 billion.11

6 Gerald R. Faulhaber, Telecommunications in Turmoil: Technology and Public Policy, (Cambridge: Ballinger U.S. INDUSTRY PROFILE Publishing Co., 1987), pp. 9-11; and Statement of Robert E. Allen, Chairman of AT&T, before the Subcommittee on Industry Structure Telecommunications and Finance, House Committee on Ener.py and Commerce, Mar. 24, 1993. The structure of the U.S. telecommunications Datapro Information Services Group, "A History of equipment industry has changed dramatically over Telecommunications Regulations," (Delran, NJ: McGraw Hill, Inc., 1992), pp. 5-6. time, particularly since the break up of American 8 Under the Carterfone decision, AT&T had the right Telephone and Telegraph (AT&1) in 1984. Prior to to require a protective connecting device between the network and the non-AT&T product. 5 Approximately 27 cmmtries around the world have 9 See section on "Regulations" for further discussion announced plans to privatize their telecommunications of the MFJ. See also Appendix C, "Glossary of Terms." networks within the next several years. Included in this 10 Faulhaber, pp. 9-11. list are Portugal, Sweden, Ireland, the Netherlands, 11 U.S. Department of Commerce data. This figure Denmark, Belgium, Germany, Hungary, the Czech encompasses SIC product codes 36611 (switching and Republic, Slovakia, Poland, Israel, Saudi Arabia, Turkey, switchboard equipment), 36613 (carrier line equipment South Africa, Kenya, Nigeria, Malaysia, Mongolia, and modems), 36614 (other telephone equipment and Singapore, and South Korea. North American components), 36631 (mobile/cellular systems equipment) Telecommunications Association (NATA), and 36693 (intercommunications systems). Some studies Telecommunications Market Review and Forecast 1994, define telecommunications as all trade in SIC 3661 and p. 254. 3663, which includes some radio products not used in

3 ~ Table 1 Examples of emerging technologles, services, and equipment In the telecommunlcatlons Industry

Selected new services & technologies Description Selected products related to new technologies Digital Services Networks are converting from analog to digital Digital switches transmission. Digital systems offer better Digital cellular phones sound quality and can accommodate more applications and services. Integrated Services Digital Network (ISDN) Technology that supports voice, data, and ISDN terminal equipment image transmission. Important for multimedia and high levels of data transmission. Asynchronous Transfer Mode (ATM) A switching and transmission protocol based Intelligent hubs on fast- technology. For data ATM switches transmission, ATM switchin9, is more efficient Adapter cards than and will therefore serve as the basis for ISDN services. Advanced Intelligent Network (AIN) An "intelligent network• has computers and Sophisticated software sophisticated software attached to the network Computers and databases to handle calls in special ways, e.g., re-routing. Computer-Telephone Integration (CTI) Integration of telephones with computer terminals PBXs to allow services such as number identification, Automatic Call Distributors (ACD) customer record display, and sales processing. Predictive dialers Key systems Packaged telephony software systems Personal Communication Services (PCS) Ubiquitous wireless communication through PCS handsets micro-cellular technology. Requires less PCS subscriber equipment power than cellular transmission. Wireless Services The extension of mobile communication to all Wireless key systems facets of the business office, from LANs to PBXs. Wireless PBXs Designed to increase flexibility and accessibility. Wireless LANs Multimedia Services Services associated with the transmission of data, Fiber optics voice, and image over the same lines. This could Video conferencing equipment include video on demand, interactive shopping, etc. T1 and T3 multiplexers Enhanced Paging Services Paging services that offer more than the standard Tone & voice pagers tone alert. These services include digital displays, Alphanumeric pagers voice mail, and response options. Global Mobile Communications Services Satellite transmission systems offering global Low Earth Orbit (LEO) satellites communications via low-powered handsets. Mobile handsets

Source: USITC staff. Types of Companies producers are multinational and multi-product corporations.13 AT&T, for example, is a strong The types of domestic companies involved in the producer in all three equipment categories-­ production of telecommunications equipment today transmission, switching, and CPE-although the range from small niche players to global corporations. majority of its revenues stems from network Although the total number of firms reaches into the equipment.14 Motorola also offers products in all thousands, there is a high level of concentration among segments, from high-end customer premises equipment several large U.S. firms, including AT&T, Motorola, (e.g., digital cellular phones and paging devices) to and GM Hughes (see figure 2).12 Most of these large 13 In addition to manufacturing different types of communications equipment, many of these companies also 11-Continued manufacture non-telecommunications products. For telecommunications. This figure was $35.5 billion in example, both AT&T and Motorola produce other types of 1993. electtonics products, such as computers and 12 Northern Telecom (Canadian) holds a substantial semiconductors. In some cases, communications share of the U.S. telecomm\D'lications market and is often equipment accounts for only half of the revenues covered in discussions of the U.S. industry. However, for generated. by these firms. the purposes of this summary, it will be discussed in the 14 American Telephone and Telegraph (AT&T), section on Canada. Annual Report, 1992, p. 22.

Figure 2 Selected U.S. firms In the telecommunlcatlons equipment Industry

Company name Selected products ADC Telecommunications Inc. Network equipment Allen Group Inc. Antennae for mobile communications American Telephone and Telegraph (AT&T) Network and CPE Equipment Aydin Corp. Microwave transmission equipment Broadcast International, Inc. Satellite communication systems California Microwave Inc. Satellite communication products Cisco Systems Data networking systems Datron Satellite communication terminals Digital Microwave Corp. Fiber optic communication systems DSC Communications Corp. Network and CPE equipment Executone Information Systems Inc. Voice processing systems General Datacomm Industries, Inc. Data communication systems General Electric Satellites and mobile products GM Hughes Satellites and mobile systems GTE Markets cellular products ' Harris Corp. Digital switches Motorola Mobile communication products Network Equipment Technologies, Inc. ATM products Octel Communications Corp. Voice and image processing systems Pl Holdings Inc. Voice/data communication products Pitney Bowes Voice processing systems Protean Inc. Intelligent hubs Qualcomm Inc. Mobile communication systems Rockwell International Commercial systems Scientific Atlanta Inc. Earth station antennae Spectrum Information Technologies, Inc. Data transmission products Superior Teletec, Inc. Fiber optic telephone cable Telco Systems, Inc. Fiber optic transmission equipment Tellabs Inc. Data multiplexers, teleconferencing equipment Tie Communications, Inc. Multifeature telephone systems Titan Corp. Advanced satellite terminals U.S. Robotics Inc. Data communications, e.g., modems

Source: SEC Disclosure Information Service and USITC staff.

5 transmission products, such as radio base stations. In quality and performance, companies are constantly addition to these multi-product vendors, many striving to improve underlying technology. For companies specialize in just one or two segments of the example, U.S. manufacturers carry out intensive communications industry. For example, GM Hughes research on software development, focuses on satellites and mobile systems, and Coming technology, and lightwave transmission. Most research concentrates on optical fibers. All of these companies takes place in the United States, although Motorola are active in international markets. reportedly has plans to open a research facility in France to develop technology specific to the needs of Research and Development Expenditures the European market. Spending on research and development (R&D) as a Telecommunications manufacturers are expected to percent of sales for the telecommunications equipment maintain or increase R&D expenditures as competition industry as a whole rose slightly between 1989 and in the industry intensifies. Manufacturers are expected 1992, reflecting an effort to keep pace with the latest to focus scarce R&D dollars on current technological technologies entering the market (see figure 3).15 issues, such as advanced switching, wireless Compared to R&D expenditures by other information communications, and multimedia transmission. technology industries, telecommunications equipment manufacturers traditionally have dedicated a slightly lower percentage of overall sales to research (figure 3). Distribution By 1992, however, spending levels among these industries were converging. Because many Telecommunications equipment is distributed telecommunications products compete on the basis of through a number of different channels. Vendors include equipment manufacturers, independent 15 Infonnation Technology Association of America distributors, Bell Operating Companies (BOCs), and (ITAA), U.S. Information Technology Industry Profile 1992, p. 11-28. This figure includes SIC 3661 and 3662, value-added resellers. Equipment manufacturers are Telephone and Telegraph Apparatus and Radio and the predominant distributors, accounting for the Equipment Among major majority of the network equipment market and 45 producers, both Motorola and DSC increased expenditures as a percent of sales between 1990 and 1992. DSC percent of the CPE market in 1993.16 reportedly spent nearly 13 percent of sales on R&D in 1992. DSC Communications Corp., Annual Report, 1992. 16 NATA, Market Review 1994, pp. 220-22.

Figure 3 Selected Information technology Industries: R & D spending as a percent of sales, 1989·92

R & D as a percent of sales 10

I . -..!.. -!. 8 - - ~- " '

.. ~ 6

4

I I Computer hardware 2 Computer software )(• )(• Telecommunications equipment

·.·. .. · ... .".'1: .. ·.:·: ...... -: ...... · . .. ..· .

0 1989 1990 1991 1992

Source: ITAA, U.S. Information Technology Industry Profile.

6 Distribution patterns in customer premises everything from a PBX to a voice mail system from equipment are changing. In the market for PBXs and one vendor. Resellers are expected to increase their key systems, independent distributors have lost market share of the distribution chain as demand for integrated share discernibly in recent years.17 This is largely due voice, data, and video communications systems to increasing competition in the market from BOCs expands.19 and manufacturers, and resulting lower prices.18 As declining prices lowered returns for independent Employment, Industry Automation, and distributors, many had to diversify their businesses or Manufacturing Locations exit the market. Equipment manufacturers have facilitated market exit by acquiring independent Reflecting efforts by U.S. manufacturers to keep suppliers. production costs low, total employment in the telecommunications equipment industry decreased by In the market for voice, data, and video CPE, approximately 2.4 percent per year on average over the value-added resellers have been increasing market last five years, falling to an estimated 44,500 in 1993 share at the expense of both independent distributors (see figure 4).20 Meanwhile, wages for and equipment manufacturers. Traditionally, telecommunications equipment workers increased at a independent distributors have been significant nominal rate of 3.7 percent between 1985 and 1990. suppliers of voice CPE, while value-added resellers The decrease in employment, combined with relatively have distributed data communications equipment. As stable shipments, is the result of higher productivity the markets for voice, data, and video equipment levels during this period. merge, however, customers are demanding one-stop-shopping. Many businesses prefer to purchase 19 Equipment manufacturers were responsible for 45 percent of distribution in 1993, value-added resellers 31 17 In 1986, approximately 34 percent of PBXs and percent, independent distributors 16 percent, and retailers 6 key systems were supplied by independent distributors, percent. NATA. Market Review 1994, p. 222. while 41 percent were supplied by manufacturers. In 20 This figure reflects trends among production 1993, manufacturers were supplying 48 percent of the employees in SIC 3661 (telephone and telegraph market, while the share of independent distributors apparatus) only. Employment of all telecommunications dropped to just 25 percent. NATA, Market Review 1994, workers declined at an average annual rate of 2.8 percent p. 220. over the same period, reaching 86,000 in 1993. U.S. 18 Price pressure on PBX equipment is due, in large Department of Commerce, U.S. Industrial Outlook 1994, part, to increasing competition from Centrex services. p. 30-3. Figure 4 Telecommunications equipment: Trends in employment and productivity, 1957.941 Thousands of employees Constant dollars (thousands) I 70 >E )CTotal employment 500 I • •outout oer emolovee 60 ~I ------·~- - - -~- . - ~ 400 ~ '"' 50 ...... ~I ~ --- "' .. .. - " - ____!. 40 ~------300

30 f------200 20

f------100 10

0 0 1987 1988 1989 1990 1991 1992 1993 1994

1 Includes production employees in SIC 3661, Telephone and Telegraph Apparatus. Source: U.S. Department of Commerce, Industrial Outlook 1994.

7 Overall, U.S. companies have not emphasized Liberalization of service markets has provided new automated manufacturing as much as their Japanese opportunities for equipment suppliers. For instance, the and European counterparts.21 U.S. plants do not 1992 decision by the Canadian Radio-Television and employ robotics to the same degree as Japanese Telecommunication Commission (CRTC) to license a companies because industry officials do not see new long-distance provider, Unitel, ended the virtual substantial savings in time or productivity levels. service monopoly enjoyed by Bell Canada Moreover, U.S. manufacturers note that much of the Consequently, Northern Telecom, Bell Canada's network equipment produced domestically relies on preferred equipment supplier, lost market share when sophisticated software and customized production Unitel turned to U.S. manufacturers as suppliers.23 methods that are not easily automated Strength in U.S. manufacturers are now significant suppliers for software development helps U.S. manufacturers remain the newly licensed carrier in that country.24 globally competitive providers of advanced Globalization also has occurred as U.S. suppliers telecommunications equipment. establish operations in developing economies to meet The location of manufacturing facilities of U.S. growing local demand for updated telecommunications firms, currently distributed across the country and equipment. Foreign governments, recognizing that advanced communications networks attract business overseas, is reportedly determined by the degree of and investment, are increasing efforts to establish or labor intensity, skill requirements, and component upgrade telecommunications infrastructure. U.S. inputs required by individual products. companies have located production facilities in many Capital-intensive products requiring high-skilled labor of these new markets to better serve them. For and high-technology components (e.g., digital example, AT&T has undertaken a joint venture in switches) generally are manufactured domestically. Beijing to produce fiber optic cable that will be used to Products incorporating commodity electronic modernize and expand China's infrastructure.25 In components and labor-intensive manufacturing addition, AT&T has purchased an 80 percent stake in processes often are produced by overseas subsidiaries the Polish telecommunications equipment located in low-wage regions. For example, both AT&T manufacturer, Telfa, which will serve as a primary and Motorola have manufacturing facilities for supplier to Poland's telecommunications service communications products in Korea, Taiwan, and other providers.26 The availability of relatively low-cost countries with lower production costs. labor in these markets provides additional incentive to invest in overseas facilities.

Globalization Regulations and Standards Affecting the Industry The globalization of telecommunications equipment suppliers has been a fairly recent While the U.S. telecommunications service phenomenon; traditional supplier relationships in this industry continues to be highly regulated at the Federal industry remained stable for decades. Today, however, and State level, only a few regulations directly affect many of the top 50 communications equipment the telecommunications equipment industry.27 The manufacturers are global, with most deriving more 23 Telecommunications Industry Association (TIA), than 30 percent of their overall revenues from foreign "Market Access for Telecommunications Equipment in markets.22 Three basic trends are driving globalization Canada," Dec. 1992, p. 4. in the U.S. telecommunications equipment industry. 24 AT&T acquired a 20 percent equity stake in Unitel and provides the company with intelligent network First, overseas demand for equipment is increasing in equipmenL Telecommunications Reports, Jan. 11, 1993; response to the liberalization of telecommunications and AT&T, Form 10-K, Annual Report to the Securities service markets and privatization of service providers. and Exchange Commission, 1993, p. 8. 25 While companies may locate manufacturing Second, as many countries work to establish or update facilities in new markets to improve market access, some telephone infrastructures, U.S. equipment countries-such as China-require that manufacturing take manufacturers are establishing joint ventures and place in-country so that the host country benefits in terms of jobs, skills, and technology transfer. subsidiaries overseas. Finally, leading equipment 26 AT&T, Annual Report, 1992, p. 17. producers continue to shift production, usually that of Z1 FCC regulations may also affect the equipment low-end customer premises equipment, to low-wage industry indirectly. Such regulations include depreciation schedules mandated for the local telephone service overseas locations. companies. Depreciation schedules, which are regarded by the industry as long, reportedly slow service providers' 21 Industry officials, interviews with USITC staff, capital investments in new products. On the other hand, March 1991. the FCC's 1990 decision requiring the BOCs to eventually 22 Robert Preston, "Product, Geographic Diversity upgrade networks for ISDN capabilities likely will prove Evident in Manufacturer Ranking," Communications Week beneficial for manufacturers of ISON-compatible International, Sept. 20, 1993, p. 23. equipment.

8 primary regulation affecting both wireline and wireless manufacturers directly. Following the development of telecommunications equipment stems from the analog cellular communications in the early 1980s, a Modified Final Judgment (MFJ).28 Implemented in number of transmission standards emerged 1984, the MFJ prohibits the Regional Bell holding worldwide.33 In the United States, the FCC mandated companies from manufacturing telecommunications adherence to the "Advanced Mobile Phone Service" equipment The manufacturing ban was designed to (AMPS) transmission standard. The existence of one encourage competition and innovation in the standard, based on technology developed by U.S. equipment sector by preventing the captive supplier manufacturers and service providers, reportedly arrangement that allegedly had existed under AT&T. conferred benefits on the domestic cellular equipment The ban continues today, though many of the RHCs industry. Large economies of scale enabled have requested that this portion of the MFJ be manufacturers to offer products at relatively low overturned. Two telecommunications regulatory reform prices, thereby encouraging several other countries to bills addressing the elimination of the manufacturing adopt the AMPS standard as well. As digital cellular ban were reviewed in Congress during 1994.29 technology has developed, however, several Although Congressional action on this issue was halted transmission standards have emerged in the United in September 1994 with the withdrawal of the Senate States. In this instance, the FCC has chosen to remain bill, similar legislation likely will be reintroduced next neutral, leaving the market to determine the year. 30 In addition to Congressional action, four RHCs predominant digital cellular standard.34 filed a motion with the U.S. District Court in Washington in July 1994 requesting that the There are currently two competing digital cellular standards in the U.S. market, Time Division Multiple "counterproductive" MFJ be overtumed.31 Some Access (fDMA) and Code Division Multiple Access industry officials believe that, given recent trends (CDMA).35 Although telecommunications toward deregulation of the industry overall, it is likely manufacturers are developing "dual-mode" equipment that the manufacturing ban will be removed eventually. 32 able to service both AMPS and one of the two digital standards, the continued use of two competing digital In recent years, government regulations have been standards may prevent firms from achieving the particularly important in the development of wireless economies of scale necessary to produce low-cost equipment Transmission standards and FCC licensing equipment. Some analysts speculate that the U.S. of cellular operators are two areas that have affected industry may experience a slower transition to digital technology than other countries because of its failure to 28 United Stales v. Am£rican Telephone and Telegraph select one standard. Other analysts maintain that Co., 552 F. Supp. 131 (D.D.C. 1982), ajf'd sub norn., permitting the market to set the prevailing standard Maryland v. United States, 460 U.S. 1001, 103 S. Ct. will prevent companies from adopting a technology 1240, 75 L. Ed. 2d 472 (1983). This decree was technically a modification of the final judgment (MFJ) that could be rendered obsolete or inefficient in a few that settled an earlier antitrust case in 1956. years. 29 In the House, Representatives Jack Brooks (D-TX) and John Dingell (D-MI) introduced a bill addressing the Other regulations that indirectly affect the MFJ ban in 1993 (H.R. 3626). Among other things, the bill would allow the RHCs to petition the Attorney equipment industry include FCC rulings on cellular General for permission to enter the manufacturing licenses and spectrum allocations.36 When the FCC business. The RHCs would face a 1- to 2-year waiting period after enactment of the legislation. In the Senate, 33 For more information on the different analog and Chairman of the Commerce Committee Ernest Hollings digital standards, see U.S. International Trade Commission (D-SC) introduced a bill (S. 1822) that would allow the (USITC), Global Competitiveness of U.S. Advanced RHCs to manufacture equipment. The House passed H.R. Technology industries: Cellular Communications (inv. No. 3626 in June 1994. Charles Mason, "House Passes 332-329), USITC publication 2646, June 1993; and Telecom Bills as Senate Girds for Showdown," Telephony, USITC, ..I'echnical Standards and International July 4, 1994, p. 6. Senator Hollings withdrew his bill (S. Competition: The Case of Cellular Communications," 1822) in September 1994 in response to increasing Industry, Trade, and Technology Review, Oct. 1993, p. 11. opposition on certain issues. Dan O'Shea, "Wait 'til Next 34 Digital transmission offers a much higher call Year," Telephony, Oct. 3, 1994, p. 6. capacity than analog transmission. Thus, as cellular 30 Dan O'Shea, "Wait 'til Next Year," Telephony, Oct subscribership grows and pushes service areas towards full 3, 1994, p. 6. capacity, carriers generally are switching to digital 31 The motion states that the MFJ restrictions place an systems. unnecessary burden on RHCs, consumers, and the U.S. 35 TOMA technology, by splitting a frequency channel economy. "Motion of Bell Atlantic Corporation, into different time slots, can transport an estimated 6 BellSouth Corporation, Nynex Corporation, and times as many calls over a channel than analog Southwestern Bell Corporation to Vacate the Decree," transmission technology. CDMA technology, by scattering Civil Action No. 82-0192, United States District Court for call packets over a wide range of frequencies, reportedly the District of Columbia, (July 6, 1994). increases call capacity by 10 to 20 times analog levels. 32 Industry officials, telephone interview with USITC 36 The FCC regulates all non-government use of radio staff, June 7, 1994. spectrum in the United States.

9 divided the U.S. cellular service market into 306 could delay deployment for five years; this expectation Metropolitan Statistical Areas (MSAs) and 428 Rural delayed development of data PCS products.42 In June Service Areas (RSAs) in 1989, it authorized the 1994, however, the FCC revised its rules and decided issuance of licenses to two carriers within each area, to allocate a less populated band of spectrum for data one to the existing wireline carrier,37 and one to an PCS.43 unaffiliated wireless operator (a "pure-play" provider). While this structure is viewed as having served Consumer Characteristics and Factors competition well in many respects, it also is seen as Affecting Demand having some drawbacks.38 The main equipment-related complaint was made by wireline Consumers of telecommunications equipment vary BOC carriers. They assert that, unlike their "pure-play" depending on the types of products involved. competitors, they have been unable to manufacture Consumers of network equipment are primarily customized equipment specific to the needs of their common carriers, owners of private networks (e.g., service areas due to the MFJ ban on manufacturing. large corporations), and competitive access providers Similarly, some industry analysts note that the wireline (e.g., Teleport Communications Group, Metropolitan service providers effectively have been discouraged Fiber Systems). Consumers of CPE equipment, on the from expanding overseas, since many foreign other hand, include common carriers, businesses, governments prefer to offer cellular licenses to government, and individual residential customers. The companies that may provide both services and primary factors affecting purchases of both types of equipmenL equipment are quality, features, and price, although the Finally, FCC spectrum allocation decisions also latter is more important for CPE equipment affect U.S. equipment production. In early 1994, the Demand for network equipment is largely affected FCC finalized its efforts to structure licensing areas and allocate spectrum for Personal Communications by the emerging technologies and potential service Services (PCS). Auctions for narrowband PCS licenses offerings referred to above (see table 1). Because the took place in July 1994, and auctions for broadband cost of replacing transmission equipment and central services are scheduled to occur in December 1994. office equipment is high, many common carriers With the regulations surrounding this new industry reportedly are waiting to determine which services close to completion, nearly all equipment customers will demand before they upgrade networks. manufacturers are endeavoring to develop PCS product New equipment will need to incorporate features that lines. There was some concern, however, that delays are compatible with the new service offerings. during the PCS allocation process would affect certain Consumers of customer premises equipment, such U.S. suppliers detrimentally.39 For example, since as telephone sets and PBXs, rely largely on price and spectrum already had been allocated in other countries (e.g., Great Britain and Germany), some observers quality in deciding which type of product to purchase. suggested that these countries would have an Price is a strong factor in the purchase of commodity advantage in developing PCS products. 40 telephone sets for the home, and even for cellular phones. Although cellular reception reportedly is better Another factor influencing PCS manufacturers, with digital transmission, many consumers likely will particularly manufacturers of data PCS products, is the continue to use analog service and equipment until the degree to which allocated spectrum is already price of digital handsets declines.44 As new service populated by fixed microwave users. The FCC originally allocated a heavily populated band of 42 Most c01mtries have allocated spectrum in the 2 spectrum to data PCS providers.41 It was estimated GHz range for PCS. This range currently is used for that the time and expense required to relocate the microwave communications by utilities, railroads, and the petroleum industJy. The FCC requires PCS licensees to microwave users currently in that band bear the cost for relocating incumbent spectrum users. (FCC, EI' Docket No. 92-9, Sept. 17, 1992.) In Japan and 37 In most cases, the existing wireline carrier was a Europe, microwave incumbents are responsible for the Bell 9perating Company. cost of relocating to a different frequency. 38 USITC, Cellular Communications, USITC 43 The revised rules also provide certain advantages publication 2646, pp. 4-1 to 4-4. for manufacturers of voice PCS equipment. For example, 39 Delays included FCC-mandated time for testing the decision to allocate a contiguous band of spectrum emerging technologies, revisions to original spectrum rather than an upper and a lower band will preclude the allocation decisions, and debates over auction rules. need for dual-band PCS handsets. For more information, 40 Jonathan Friedland, "Will You Accept," Far see FCC, Memorandum Opinion and Order, GEN Docket Eastern Economic Review, Feb. 17, 1994, p. 43; and Kurt No. 90-314, Jme 9, 1994. A. Wimmer, "Global Development of Personal 44 While price is the key factor affecting purchases of Communications Services," Communications Lawyer, cellular earphones, purchasers of portable phones cite size, Summer 1992, p. 7. weight, and features (such as speed dialing, alphanumeric 41 Software Publishers Association, "Federal memory, and other "productivity enhancers') as key Communications Commission Allocates Spectrum for factors affecting demand. For further information see, Licensed PCS Providers and Unlicensed Data-PCS USITC, Cellular Communications, USITC publication Devices," Government Affairs Briefing, Oct. 1993. 2646, pp. 3-8 to 3-9.

10 offerings become available, however, customers likely vertically integrated, multinational company that will compare features and upgrade options when produces a full range of telecommunications deciding to purchase CPE. For example, phones that products.46 In addition to Northern, there are a number digitally display a phone number are necessary for the of smaller equipment suppliers headquartered in new "caller ID" service offered by many phone Canada. For example, Gandalf, Glenayre, Mitel, and companies. Similarly, as businesses purchase PBXs, New bridge offer a narrow range of many are looking for equipment that is compatible telecommunications products, generally targeted at with new applications in messaging, voice processing, new technologies and applications. Most of Canada's and computer-telephone integration. equipment manufacturing takes place in Ontario and Quebec, but Northern Telecom has plants and/or FOREIGN INDUSTRY PROFILE affiliates in each Canadian province. In addition to Most of the major non-U.S. suppliers of these domestic companies, several non-Canadian telecommunications equipment are located in Canada, multinational firms have located manufacturing or Europe, and Japan (see table 2). Many companies R&D facilities in Canada, including Ericsson, Alcatel, headquartered in these countries manufacture low-end and Motorola. Total production of telecommunications customer premises equipment in East Asia, due to the equipment in Canada reached $2.2 billion in 1992.47 availability of low wage labor in this region. Just as The Canadian telecommunications industry U.S. manufacturers are affected by the demands of new accounts· for 25 percent of total Canadian electronics technologies and services, so, too, are major foreign output48 Production has declined slightly in recent producers. Manufacturers in these countries are years as competition from foreign fmns has intensified focusing production strategies on digital equipment and smaller companies have consolidated production. 49 and advanced software products. Further, the trend toward privatization and liberalization of national 46 In 1992, 50 percent of Northern's revenues were telecommunications services is affecting the producers from sales of central office switching equipment, 25 percent from business communications systems, and 11 of telecommunications equipment in these countries, percent from transmission systems. Northern Telecom encouraging them to focus on export markets. Each Limited, Annual Report, 1992, p. 28. region is discussed individually below. 47 The production figures used in this section refer to equipment classified in HTS headings 8517 and 8520. Canada Because this does not include cellular, fiber optic, or satellite production, some estimates may appear Canada is home to Northern Telecom (Northern), conservative. Elsevier, Yearbook of World Electronics one of the five largest telecommunications equipment Data 1993, pp. 14-15. Other sources report that Canadian suppliers in the world (see figure 5).45 Northern is a production reached $3.9 billion in 1990. Canada, Industry Profile, p. 2. 48 Elsevier, Yearbook of World Electronics Data 45 Approximately 40 percent of Northern's 1993-Volume 2, America, Japan, & Asia Pacific, p. 57. manufacturing and administrative costs, and 60-70 percent 49 Canada, Industry Profile, pp. 3-4. of its R&D costs, were incurred in Canada in 1991. However, the company has operated extensive facilities in the United States since 1971. Industry, Science. and Technology Canada, Industry Profile-Telecommunications Equipment, (Ontario, 1991), p. 4.

Table 2 Telecommunications equipment: International production trends, 1990-931 CAGR2 CAGR2 1990 1991 1992 1993 '90-'93 '92-'93

Million dollars Percent -- Western Europe ...... 28,000 28,416 28,156 28,593 0.7 1.6 Japan ...... 14,614 15,496 13,985 13,622 -2.3 -2.6 Canada ...... 2,409 2,234 2,191 2,209 -2.8 0.8 Korea ...... •...... 1,756 1,884 1,920 1,960 3.7 2.1 ASEAN countries ...... •.... 1,344 1,592 1,674 1,960 13.4 17.1 China •...... 897 1,070 1,230 ~3) 417.1 515.o Mexico ...... •... 374 355 373 3) 4-0.1 55.1 India ...•...... 617 529 476 498 -6.9 4.6 1 Includes HTS heading numbers 8517 and 8520. 2 Compound annual growth rate. 3 Not available. 4 Compound annual growth rate 1990-92. s Compound annual growth rate 1991-92. Source: Elsevier, Yearbook of World Electronics Data, 1993.

11 Figure 5 were equal to 11 percent of sales in 1992.S2 By Telecommunications equipment: Top 15 major comparison, U.S. firms' expenditures ranged from 5 to producers and global communications 12 percent of sales in 1992.S3 Finally, Canadian revenues, 1992 producers are taking advantage of other countries' liberalized markets to expand exports and overseas ($ millions) investment. (1) Alcatel $15,558 [France] In recent years, Northern has established several (2) Siemens $11,877 strategic alliances and joint ventures with foreign [Germany] companies as a means of market entry, and thus is (3) AT&T $10,809 becoming a key supplier in many foreign regions.S4 In [U.S.] 1992, revenues from non-Canadian sources amounted (4) Motorola $8,374 to 73 percent of the company's total revenues. Revenue [U.S.] from Europe alone increased from 3 percent of (5) Northern Telecom $8,029 Northern's total revenue in 1990 to 16 percent in 1992, [Canada] principally reflecting increased sales in the liberalized (6) Ericsson $7,693 U.K. market.SS Northern continues to be one of the [Sweden] largest suppliers to the U.S. market, ranking second (7) NEC $ 7,591 only to AT&T in many product segments.S6 [Japan] (8) IBM $5,300 Western Europe [U.S.] (9) Fujitsu $3,738 In 1992, 10 of the top 20 world producers of [Japan] communications equipment were based in Europe, (10) Bosch Group $ 2,692 including number one-ranked Alcatel of France (see [Germany] figure 5). Alcatel's acquisition of several other (11) GEC $2,648 equipment manufacturers allowed it to overtake AT&T [UK.] and become the world's largest producer in late 1991. (12) ltaltel $ 2,239 Siemens of Germany is now the second largest [Italy] producer in the world. Other Europe-based top 20 (13) Philips $ 2,185 producers are Ericsson, the Bosch Group, GEC, Italtel, [Netherlands] Philips, Ascom Group, Nokia, and Matra Hachette. (14) GTE $ 2,000 Both Alcatel and Siemens enjoy a strong competitive [U.S.] position in markets for wireline transmission ·and (15) GM Hughes $1,900 public switching equipment. Ericsson and Nokia, [U.S.] meanwhile, hold a strong position in the market for mobile equipment Overall, transmission and switching equipment account for over half of European Source: Communications Week International, production of telecommunications equipment. Sept. 1993. Customer premises equipment, less capital-intensive than transmission and switching equipment, accounts Overall, however, the industry has remained stable due to several factors. First, Canada enjoys a sophisticated S2 Northern Telecom Limited, Annual Report, 1992, p. 22. In some cases, Northern has joined forces with other market of 27 million people which, although small, companies. For example, after collaborating with interacts closely with the larger U.S. market.so U.S.-based Bellcore for 3 years, the companies Second, Northern and other equipment suppliers demonstrated a high quality end-to-end system for delivering video-on-demand to the home in November consider R&D a top priority and are concentrating 1992. Ibid., p. 22. efforts on new and emerging technologies.Si SJ Based on data from Annual Reports of AT&T, Northern's expenditures on R&D, largely focused on DSC, and Motorola; and ITAA, U.S. Information Technology Industry Profile 1992, p. Il-28. high-speed digital transmission over optical fibers, 54 Northern entered a strategic alliance with Matra Communications of France, and established joint ventures so The U.S. market accounted for 54 percent of with Agroman lnversiones S.A. of Spain, Elwro of Northern's total revenues in 1992 ($4.5 billion), while Poland, and Netas of Turkey. In addition, Northern has Canada accounted for only 27 percent of the total ($2.24 entered into numerous supplier agreements with billion). Northern Telecom Limited, Annual Report, 1992, telecommunications service providers all over the globe. p. 27. SS Northern Telecom Limited, Annual Report, 1992, p. Sl Northern Telecom Limited, Annual Report, 1992, 27. p. 22. S6 NATA, Mark£t Review 1994.

12 for less than 20 percent of Western European manufacturers.62 Other pan-European decisions that production.57 Like the United States, European benefit the equipment industry include the European countries largely import CPE products from East Asian Union's terminal equipment directive,63 which countries. simplifies the type-approval process necessary for bringing CPE to market, and ETSI's work toward a Between 1990 and 1993, production of European ISON system.64 telecommunications equipment in Europe increased at an average annual rate of less than 1 percent, reaching Research and development expenditures by 8 $28.6 billion by 1993.5 Production stagnated European companies have varied over recent years. somewhat in the late 1980s with the slowing of the Both Alcatel and Ericsson have reported growth in economies in many European countries. However, spending, with R&D accounting for approximately 9 production reportedly will increase as Greece, percent and 15 percent of net sales, respectively, in Portugal, and Spain upgrade their telecommunications 1991.65 In many cases, alliances are formed to share systems, and as Central European countries develop technology for high-cost development processes, such modern infrastructures. as those required to develop new switches for public Production costs in European countries often are networks. For EU-based companies, certain higher than those found in Japan or East Asia, but are government programs support collaborative R&D for similar to those in the United States. Compared to the development of telecommunications equipment. Japanese firms, European firms tend to be slightly less For example, the EU Framework for Research and automated, and the cost of labor generally is higher. Development program plans to invest approximately Employment in the European telecommunications $2.2 billion on information technologies over the next industry, as in the U.S. industry, is falling due to higher 5 years.66 productivity rates and industry consolidation.59 The opening of European markets to competition is European manufacturers benefit from forcing domestic equipment suppliers to compete with pan-European standardization and regulation of the foreign companies. To take advantage of opportunities, industry. The European Telecommunications Standards foreign firms (including U.S. firms) are locating Institute (ETSI) was established in the 1980s to manufacturing plants in Europe. In many cases, develop standards for manufacturers of production facilities are located in southern Europe telecommunications equipment. ETSI's effort to set a where labor and startup costs tend to be lowest and pan-European digital standard for cellular sufficient skilled labor is available.67 In response to communications equipment, the Global System for increased competition from non-EU companies, Mobile Communications (GSM),60 has proved European manufacturers are expanding their export beneficial for European manufacturers.61 Because Europe's early decision on this issue resulted in a 62 All manufacturers benefit from the economies of commercially viable system, several countries outside scale generated by the single standard. Motorola plans to double the capacity of its mobile telephone plant in Europe have adopted the GSM standard. This is Scotland in 1994, due to spiralling demand for GSM expected to increase economies of scale and reduce handsets. Richard Wilson, "GSM Demand Hastens production costs for European equipment Motorola Expansion," Electronics Weekly, Dec. 1, 1993, p. 4. 63 Council Directive on the Approximation of the Laws of the Member States Concerning Telecommunications Terminal Equipment, Including Mutual Recognition of 57 Percentages based on 1991 figures. Commission of Their Conformity, Directive 91/263/EEC, Official Journal, the European Communities (EC), Panorama of EC No. L 128, (May 23, 1991), p. 1. Industry 93, p. 10-21. 64 Ellen O'Brien Martz, "ISON Deployment Moves 5B Elsevier, Yearbook of World Electronics Data 1993, Slowly but Surely," TE&M, Aug. 15, 1993, p. 30. vol. 1, West Europe, pp. 14-15. Telecommunications service providers in Europe agreed to 59 During 1989-92, employment in the implement a standardized "Euro-ISON'' to prevent telecommunications industry in the European Union (EU) piecemeal market development within each country. This declined at an average annual rate of 1.4 percent. This is contrasts with the U.S. demand-driven approach to ISON, slightly lower than the 3.3 percent decline in U.S. which is less centralized. Ibid., p. 30. employment during the same time period. EC, Panorama, 65 Alcatel, Prospectus, 1992, p. 49; Ericsson, Annual pp .. 10-22 to 10-24. Report, 1992, p. 19. 60 This standard originally stood for "Groupe Speciale 66 Denise Claveloux, "EC Details Fourth Framework Mobile" but the name was changed to promote the Funding Guidelines," Electronics, Mar. 28, 1994, p. 12. standard beyond European borders. USITC, Cellular Funded by EU governments, the overall goal of the Communications, USITC publication 2646, p. 4-14. framework program is to increase the competitiveness of 61 While Europe endured a variety of standards for EU industries through collaborative R&D. Ibid., p. 12. analog cellular communications, it has decided to 67 For example, both Ericsson and AT&T have encourage one standard for digital cellular transmission. manufacturing facilities in Spain. EC, Panorama, EC, Panorama, p. 10-23. p. 10-24.

13 focus with the United States and Japan as the principal Subscription to these services increased by 43 percent export markets. and 14 percent, respectively, during 1991-92.71 In addition, the Ministry of Posts and Telecom­ Japan munications is promoting a new "info-communications services infrastructure," which will provide a wide The telecommunications equipment industry in range of communications services across Japan. To this Japan has expanded significantly since the end, the country is working to extend to 68 privatization of telecommunications services. In all homes by 2010.72 1992, 4 of the 20 largest world suppliers of telecommunications equipment were headquartered in While all large Japanese equipment manufacturers Japan. The four, NEC, Fujitsu, Matsushita Electric, and are important suppliers to Japan's primary Toshiba, are all significant players in the global communications service operator, Nippon Telephone industry (see figure 5). Three other large Japanese and Telegraph (NTT), most are trying to expand their suppliers, Hitachi, Sumitomo, and Oki Electric, fall export focus to take advantage of opportunities in other within the top 25 global suppliers. Most of these firms liberalized and growing markets. For example, NEC is manufacture a combination of transmission and a highly globalized company with subsidiaries and switching equipment and CPE. Overall, production affiliates in 28 countries, including the United States.73 decreased slightly during 1991-93, primarily due to NEC recently announced plans to transfer its economic recessions in Japan and several overseas production of ATM switches from Japan to its facility markets. in the western United States, in anticipation of better access to the growing demand in the U.S. market. The major Japanese producers are similar in many Fujitsu also is expanding its global presence and has respects to major U.S. telecommunications equipment established R&D facilities in Texas and London. In producers. The above-mentioned Japanese companies spite of these global efforts, most Japanese production are multi-product firms, with revenue from sales of is consumed domestically. NEC, ranked seventh telecommunications equipment accounting for only 10 among global equipment suppliers in 1992, receives 75 to 40 percent of overall revenue.69 Expenditures on percent of its overall revenue from domestic sales.74 research and development by Japanese firms generally mirror the range of spending by top U.S. suppliers. The Other Asian Countries overall level of R&D spending as a percentage of total In recent years, Asian countries have become revenues reported by Japanese companies ranged from important sites for the production of Ricoh's low of 5.5 percent to a high of 17 percent telecommunications equipment.75 A considerable reported by NEC in 1991.70 Most major Japanese portion of Asian production is accounted for by telecommunications companies have reported stable or subsidiaries of foreign multinationals, taking advantage increasing R&D expenditures in recent years. of these countries' low production costs and advanced Like U.S. companies, Japanese firms are manufacturing skills.76 Recently, however, local responding to new technologies and service options in the industry. Japanese suppliers are working to meet 71 Figures compare Sept. 1992 to SepL 1991. MPT, Communications in Japan 1993, Summary, p. 3. the growing demand for mobile telephones and pagers. 72 U.S.-Japan Telecommunications Infrastructure Council, Meeting, SepL 22, 1993. This differs from the 68 Over the years, the service industry in Japan has U.S. concept of an information superhighway in its changed from being a government-controlled monopoly, to treatment of the "fiber-to·the-home" (FTTH) concept. a public corporation regulated by the Ministry of Posts While Japan is promoting FTTH as a mandatory and Telecommunications (MPT). The public corporation, component of the country's infrastructure, the United Nippon Telephone and Telegraph (NTT), was privatized in States has suggested that the private sector should 1985, following the enactment of the "NTI Corporation determine the most effective method of providing homes Law." Liberalization of the industry was encouraged by with necessary services. FTTH is not a central Japan's Ministry for International Trade and Industry component of the U.S. discussion for a superhighway. (MID), which reponedly expressed fear that the monopoly lbid7 Sept. 22, 1993. structure of the industry was hindering innovation among 3 Elsevier, Profile of the Worldwide Japanese manufacturers of communications equipment. Telecommunication Industry, p. 123. Industry official, interview with USITC staff, 1991. 74 Motorola, on the other hand, generated 69 Elsevier, Profile of the Worldwide approximately 60 percent of its revenues from overseas Telecommunication Industry, (Oxford, 1992). sales. Motorola Inc., Annual Report, 1992, p. 34. 70 These figures represent total spending on R&D, not 15 These countries include Hong Kong, India, R&D specifically for communications products. Elsevier, Indonesia, Korea, Malaysia, the Philippines, Singapore, Profile of the Worldwide Telecommunication Industry, Taiwan, and Thailand. (Oxford, 1992). Estimates suggest NEC spent 19 percent 76 Even within Asia, however, production costs vary. of net sales on R&D in 1992; 18 percent of R&D AT&T's decision to transfer the production of its cordless spending went directly to research on communications telephones from Singapore to the Indonesian island of products. Domicity Ltd., NEC: A Strategic Analysis, Batam is largely due to increasing land and labor costs in p. 3-4. Singapore. East Asian Executive Reports, Oct. 1991, p. 8.

14 companies have prospered, talcing advantage of Asia's ("TeleTech Park") to be dedicated exclusively to growing and increasingly liberalized market.77 telecommunications and information technology. Although industry officials suggest it is difficult for Tenants of the park would share marketing and testing small start-up companies in Asian countries to compete facilities. Korea's Government. along with Goldstar, with established subsidiaries of foreign firms, many are Samsung, Daewoo, and Otelco, supports the making in-roads through one of three methods: Electronics and Telecommunications Research establishing niche markets, building on OEM Institute, which has developed a digital switching relationships,7S or forming partnerships with Western exchange known as "IDX." companies. The sale of niche products has proven successful U.S. TRADE MEASURES for firms such as Hong Kong's NUTS Technologies and Champion Technology, which sell desktop Tariff Measures videoconferencing systems and multilingual pagers, U.S. tariff rates on telecommunications products respectively. Other firms have entered the market by are comparable to those in many industrialized building on existing OEM relationships. These countries and are low relative to those in many companies initially manufactured products only for developing countries. The U.S. trade weighted average other firms, but later marketed products under their tariff on telecommunications equipment in 1993 was own names after establishing a good reputation in the 4.1 percent ad valorem (see table 3). Under the North industry. This strategy has reduced the start-up costs American Free Trade Agreement (NAFTA), which traditionally associated with manufacturing new entered into force on January 1, 1994, U.S. tariffs on products. most telecommunications imports from Mexico and Asian telecommunications firms also rely on Canada were eliminated.st Tariffs also will be reduced partnerships with Western or Japanese companies to as a result of the Uruguay Round Agreement (URA). s2 establish themselves. Asian firms supply the plant and Under the URA, the United States will reduce its labor, whereas Western companies generally provide telecommunications tariffs by up to 50 percent, the technology. Companies such as Ericsson, Siemens, depending on the product S3 The resulting U.S. and AT&T have entered into joint ventures to increase trade-weighted duty for this sector is expected to their presence in the growing Asian market 79 For decline to approximately 1.6 percent ad valorem.S4 example, production in China has increased substantially in recent years as multinationals establish Nontariff Measures joint manufacturing to supply the rapidly expanding The U.S. market for telecommunications Chinese marketplace. Asian governments facilitate equipment generally is regarded as open. However, the these relationships because they encourage local EU asserts that certain U.S. standards requirements production and high-tech R&D. impose unnecessarily high costs on European network Asian governments are actively encouraging the equipment suppliers; the EU also asserts that some establishment of globally competitive telecom­ U.S. standards setting processes lack transparency.SS munications industries.so Singapore's government is 81 U.S. tariffs on telecommunications products considering the establishment of a research complex imported from Canada were already eliminated, due to the 1989 U.S.-Canada Free Trade Agreement (CFTA). For 77 Nick lngelbrecht, "Busy Signals All Over Asia," more information on NAFTA, see USITC, Potential Asian Business, Sept. 1993, p. 57. Regional sales of Impact on the U.S. Ecorwmy and Selected Industries of telecommunications products are expected to reach $16.6 the North American Free-Trade Agreement (inv. No. billion by 1995. There are plans for liberalizing 332-337), USITC publication 2596, Jan. 1993. telecommunications markets in India, the Philippines, 82 For more information on the impact of this Indonesia, Malaysia, and Singapore. Ibid., p. 57. agreement on the U.S. telecommunications sector, see 78 Original equipment manufacturers (OEMs) are USITC, Potential Impact on the U.S. Economy and companies that manufacture products to be sold under Industries of the GATT Uruguay Round Agreements (inv. another company's name. Harry Newton, Newton's No. 332-353), Volume I, USITC publication 2790, June Telecom Dictionary, p. 736. 1994. 79 For example, AT&T has formed several joint 83 There are a limited number of products whose ventures in Taiwan, including AT&T Taiwan tariffs have not been reduced at all, including the majority Telecommunications Co. and United Fiber Optic of fiber optic equipment. Many industry representatives Communications, Inc. AT&T, Form 10-K, Annual Report would like to see all telecommunications tariffs worldwide to the Securities and Exchange Commission, 1993, p. 6. reduced to zero. Industry officials, telephone interviews 80 This is particularly true in Singapore, Korea, Hong with USITC staff, Mar. 3 and 4, 1994. Kong, and Taiwan. The Government of Singapore, for 84 The Uruguay Round Agreement has not yet been example, is trying to promote the manufacture of more appi::oved by Congress. value-added goods in its country, rather than just 85 1994 Report on U.S. Barriers to Trade and labor-intensive products. Singapore officials, interview Investment, (Brussels: Services of the European with USITC staff, May 25, 1994. Commission, 1994), pp. 99-100.

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16 Table 3-Contlnued Telecommunlcatlons equipment: Harmonized Tariff Schedule subheading; description; U.S. col. 1 rate of duty as of Jan. 1, 1994; U.S. exports, 1993; and U.S. Imports, 1993 ·

~I. l WI gf dL!llt U.S. U.S. HTS &export As of Jan.1, 1994 exports, Imports, subheading Description General Specla11 1993 1993 -- Million dollars -- 8517.90.36 Printed circuit assemblies for telephonic switching or terminal apparatus (other than telephone 8.5o/o Free (A,CA,E,IL,J,MX) (4) (5) 8517.90.38 Prln~:l circ0u0it ~ssemblies for other teieph~~ic...... apparatus ...•...... •...... •...... 8.5o/o Free t'B,CA,E,IL,J,MX) 8517.90.40 Parts of telephonic apparatus, nesi ...... 8.5%3 Free A,B,CA,E,IL,~ 5~J 8517.90.44 Printed circuit assemblies for telegraphic apparatus ..... 4.7o/o Free A,CA,E,IL,J, X) (5) 8517.90.48 Parts for printed circuit assemblies for telephonic ~:~ switching or terminal apparatus (other than telephone sets) ...... 8.5o/o Free (A,CA,E,IL,J,MX) (4) (5) 8517.90.50 Parts of other telephonic apparatus ...... •. (6) 633 (7) 8517.90.52 Other parts for printed circuit as$emblies for telephonic apparatus ...... 8.5o/o Free fA,B,CA,E,IL,J,MX) (4) 8517.90.55 Parts of modems of subheadin~ 8517.40.1 o ...... 4.7%3 Free A,CA,E,IL,J) (4) ~J 8517.90.56 Parts for printed circuit assemb ies for telegraphic apparatus ...•...... •...•...... 4.7o/o Free (A,CA,E,IL,J,MX) (4) (5) 8517.90.58 Other parts for telephonic switching or terminal apparatus (other than telephone sets) •...... 8.5o/o Free (A,CA,E,IL,J,MX) (4) (5) 8517.90.60 Parts of teleWaphic switching apparatus •...... 4.7%3 Free fA,CA,E,IL,J) 12 8517.90.64 Other parts or telephonic apparatus, nspf ...... 8.5o/o Free A,B,CA,E,IL,J,MX) f :~ (5) 8517.90.66 Other parts for telegraphic apparatus, nspf ...... 4.7% Free t'CA,E,IL,J,MX) (SJ 8517.90.70 Parts of telegraphic terminal apparatus ...... 4.7%3 Free A,CA,E,IL,J) r) 8517.90.80 Parts of telegraphic apparatus, nesi ...... 4.7%3 Free A,CA,E,IL,J) :~ 164 8517.90.90 Parts of telegraphic apparatus ...... ~6) 153 <7> 8518.30.10 Telephone handsets ...... 5o/o Free (A,B,CA,E,IL,J,MX) 8 13 8518.40.10 Audio-frequency electric amplifiers for use as repeaters in line telephony ...... 8.5o/o Free fA,B,E,IL,J,MX) 56 7 8518.90.10 Parts of telephone handsets and repeaters ...... 8.5o/o Free A,B,CA,E,IL,J,MX) 8 14 8520.20.00 Telephone answering machines ...... 3.9o/o Free (A,E,IL,J,MX) 1.5o/o (CA) 108 279 8522.90.45 Printed ci~cuit ass~mblies for use in telephone answering machines ...... 3.9o/o Free (A,CA,E,IL,J,MX) (4) (5) 8522.90.55 0th.er parts of telephone answerin~ machines ...... 3.9% Free fA,CA,E,IL,J,MX) (5) 8522.90.60 Parts of telephone answering mac ines ...... 3.9%3 Free A,CA,E,IL,J) f:~ 5 8525.10.60 Transmitters for radiotelephony and radiotelegraphy ...• 6.0% Free (A,B,C,CA,E,IL,J,MX) 169 40 8525.10.80 Other transmission apparatus for radiotelephony and radiotelegraphy •...... 6.0% Free (A,B,C,CA,E,IL,J,MX) 164 42 8525.20.30 Other transceivers .•...... • 6.0% Free (A,B,C,CA,E,IL,J,MX~ 1,131 533 8525.20.50 Cordless handset telephones ...... 6.0% Free (A,B,C,CA,E,IL,J,MX 166 1,054 8525.20.60 Other transmission apparatus incorporating reception apparatus ...... 6.0% Free (A,B,C,CA,E,IL,J,MX) 1,018 774 --i See footnotes at end of table. ▪ ▪

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18 In the area of procurement, the EU and the United telephones from Japan, and telephone systems and States are trying to expand the GAIT Government subassemblies from Japan, Korea, and Taiwan.90 The Procurement Code to include utilities, but negotiators U.S. Department of Commerce found dumping and the currently disagree on coverage for telecommunications Commission made affirmative injury determinations in products. 86 There is also disagreement on whether all six antidumping cases. As a result, Commerce government entities at the sub-federal level should be issued antidumping orders. Table B-1 in Appendix B subject to the Procurement Code. 'l)7 The EU also lists the products involved in these cases, along with contends that the 6 percent "Buy American" price the original and current dumping margins. preference that may be applied by the Department of In 1989, the Commission investigated allegations Defense (DOD) and by Rural Telephone Cooperatives of patent infringement involving certain cellular and 88 (RTCs) is a nontariff barrier.89 , subassemblies, and components. Motorola alleged that Nokia Corp. and Tandy Corp. were infringing seven U.S. patents pertaining to U.S. Government Trade-Related cellular phones. Although the Commission initially Investigations issued a temporary limited exclusion order and a temporary cease and desist order, these orders were In recent years, the U.S. International Trade vacated after the parties reached a settlement Commission has conducted investigations related to agreement. In a 1992 investigation, SGS-Thomson the telecommunications industry under several alleged that imports of certain telecommunications different authorities. It has conducted six investigations chips and products containing these chips infringed under the U.S. antidumping law (19 U.S.C. 1673), several U.S. patents. The Commission found that three investigations with respect to allegations of imports infringed two of the three patents and issued a patent infringement under section 337 of the Tariff Act limited exclusion order in mid-1993. Finally, Farrallon of 1930 (19 U.S.C. 1337), and four fact-finding studies Computing Inc. alleged in 1993 that imports of certain under section 332 of the Tariff Act of 1930 (19 U.S.C. devices for connecting computers via telephone lines 1332) (see table 4 for a list). The antidumping were infringing a patent owned by Farrallon. Although investigations involved imports of paging devices from many of the respondents (Taiwanese manufacturers, Japan, cell-site radio transceivers and cellular mobile resellers, and U.S. importers) have settled, Farrallon continues to seek a general exclusion order from the 86 EU and U.S. officials, telephone interviews with USITC staff, May and Jlllle 1994. Commission. ,;, The EU seeks to have private telecommtlllications At the request of the Senate Committee on Finance providers included tlllder the GATI Government Procurement Code (the Code) if they operate Wlder for a series of studies on the global competitiveness of monopoly or dominant conditions. Conversely, the United U.S. advanced-technology manufacturing industries, States contends that only public agencies should be the Commission has completed two recent reports on subject to the Code. Further, the EU seeks to extend the Code to cover entities at the sub-federal level, including telecommunications. The first, issued in 1991, covers U.S. state and city governments. (EU official, telephone communications technology and equipment. The interview with USITC staff, May 1994.) Bilateral second study, published in 1993, addresses the cellular negotiations on this issue are linked to U.S. concerns over the European Utilities Directive, which permits price communications industry. discrimination in favor of EU telecommunications products in public procurement bids (see section on Foreign Nontariff Measures). FOREIGN TRADE MEASURES Sir The Buy American Act of 1933 (BAA) requires U.S. Government agencies to purchase domestic goods and services, unless such purchases are considered unreasonable or contrary to public interest. Under the Tariff Measures Trade Agreement Act of 1979, the BAA provisions are Tariff treatment of telecommunications equipment waived for purchases by most Federal agencies for products originating in Code signatory cotllltries, where by primary U.S. trading partners varies significantly. the procurement exceeds a certain threshold. Although Japan and Canada, the largest foreign markets for U.S. the Trade Agreement waiver does not apply to defense exports, impose no tariffs on telecommunications procurement that is exempted from Code coverage, the BAA preference applied by DOD can be waived through equipment.91 However, tariffs for most Memoranda of Understanding with NATO allies. Similar "Buy American" restrictions apply to RTCs for purchases 90 For complete cites to each of these reports, see made with Joans administered by the Rural Eleclrification table 4. Administration (CFR, Title 7, Part 1700). In addition to 91 Japan lists tariffs ranging from 0 to 4.2 percent for Federal "Buy American" restrictions, some states also telecommunications equipment, but the effective rate of imPQse "Buy American" provisions. duty has been zero for the past several years. Canadian 89 1994 Report on U.S. Barriers to Trade and tariffs on telecommllllications products imported from the Jnvestment, (Brussels: Services of the European United States were reduced to zero following the 1989 Commission, 1994), pp. 99-100. U.S.-Canada Free Trade Agreement (CFTA).

19 Table4 U.S. International Trade Commission Investigations related to the telecommunications Industry

Report Country Year Inv. Number Report No.

Title VII Investigations Paging devices ...•...... Japan 1982 731-TA-102t) USITC 1295 PaHing devic;:es ...... Japan 1983 731-TA-102 F) USITC 1410 Ce -site radio apparatus . , ...... Japan 1984 731-TA-163 P) USITC 1488 Cell-site radio transceivers ...... Japan 1984 731-TA-163(F) USITC 1618 Cellular mobile telephones ...... Japan 1984 731-TA-207t) USITC 1629 Cellular mobile telephones ...... Japan 1985 731-TA-207 F) USITC 1785 Cellular mobile telephones ...... Japan 1989 731-TA-207(F/R) USITC2155 Telephone systems Japan, Korea, & and subassemblies •...... Taiwan 1989 731-TA-426/428 (P) USITC2156 Telephone systems and subassemblies ...... Japan &Taiwan 1989 731-TA-426 & 428 (F) USITC2237 Telephone systems and subassemblies ...... Korea 1990 731-TA-427 (F) USITC2254 Section 337 lnvestlRatlons Cellular radiotelep ones ...... Japan 1991 337-TA-297 USITC2361 Certain integrated circuit telecommunication chips and products containing same, including dialing apparatus ...... Taiwan 1992 337-TA-337 USITC2670 Certain devices for connecting computers via telephone lines ... Taiwan 1993 337-TA-360 [on-going) Section 332 Investigations Telecommunications industry ...... (1) 1984 332-172 USITC 1542 Optical fibers, technology, and equipment, U.S. competitiveness ...... (1) 1988 332-233 USITC2054 Communications technology and equipment ...... (1~ 1991 332-301 USITC2439 Cellular communications ...... (1 1993 332-329 USITC2646 1 Not applicable. Source: USITC staff.

telecommunications goods entering the European tariffs on certain paging devices, certain coaxial cables, Union range from 5 to 7.5 percent ad valorem.92 and antennas are to be phased out over 10 years. 94 Tariffs imposed by emerging markets, such as Brazil, Indonesia, Malaysia, and China range up to 30 percent Under the Uruguay Round Agreement (URA) of ad valorem. Rates in India are substantially higher, the General Agreement on Tariffs and Trade (GATI), reaching 130 percent ad valorem for some products.93 foreign tariffs on telecommunications equipment are to Under NAFfA, which entered into force on January 1, 1994, Mexico agreed to reduce tariffs on imports of U.S. telecommunications equipment. 94 U.S. Department of Commerce, NAFTA Approximately 80 percent of current U.S. Opportunities, Telecommunications Sector, p. 2. NAFfA telecommunications equipment exports (by value) now also benefits U.S. manufacturers through its nontariff enter Mexico duty-free, including transmission provisions. The agreement explicitly prevents the use of equipment, PBXs, cellular phones, and modems. standards as a nontariff barrier to trade with Mexico. In addition, it improves the transparency of Mexico's Mexican tariffs on most other U.S. telecommunications standards-development process, which should ensure that exports are to be phased out over 5 years; Mexican the only line connection standards for telecommlD'lications equipment are those directly related to safety. See 92 The one exception is for radio receiver equipment, USITC, Potential Impact on the U.S. Economy and which faces a 14 percent tariff rate. Selected Industries of the North American Free-Trade 93 Industry official, telephone interview with USITC Agreement (inv. No. 332-337), USITC publication 2596, staff, Mar. 1994. Jan. 1993.

20 be reduced by up to 50 percent.95 Lower foreign over other European suppliers.99 However, the tariffs are expected to benefit U.S. exports, particularly directive permits continued discrimination against in the increasingly price-sensitive area of fiber optics. non-EU firms, including U.S. firms, by allowing EU. In addition, as developing countries reduce utilities to exclude bids having less than 50 percent EU traditionally high tariffs on telecommunications content by value. Further, EU utilities must accord equipment, the ability of U.S. companies to enter these "European" bids a 3-percent price preference over markets will be greatly enhanced.96 non-EU bids. Because government-owned utilities represent the largest market for telecommunications Nontariff Measures equipment in the European Union, U.S. Traditionally, government-owned telecom- telecommunications producers have protested the munications carriers have maintained exclusive discriminatory provisions of this directive. supplier relationships with their domestic equipment manufacturers, thus limiting sales opportunities for The discriminatory aspects of the Utilities foreign suppliers. Nontariff barriers such as these are Directive initially were cited by the Office of the U.S. being eliminated slowly as telecommunications Trade Representative (USTR) in a February 1992 markets are opened to competition. However, suppliers report on the government procurement policies of the reportedly still face nontariff barriers in a number of Eu.100 In April 1992, the President announced plans countries, including preferential procurement policies to institute sanctions by January 1993 if the EU in the European Union, Korea, and Japan. Different implemented the directive with its discriminatory standards, testing, and certification requirements provisions.101 Following several rounds of among countries also have acted as impediments to unsuccessful negotiations in 1992, the EU permitted trade in certain markets, including Korea. 97 ·the directive to enter into force on January l, 1993.102 Thereafter, the President announced that he would take European Union (EU) retaliatory action under Title VII of the Omnibus Trade and Competitiveness Act of 1988.103 The action, On January 1, 1993 the Utilities Directive of the European Union (formerly the European Community) 99 USITC, The Year in Trade 1993, USITC entered into effect 98 This directive opened the publication 3769, June 1994, p. 81. Government-owned utilities in the EU are not currently governed by the region's government-owned utilities (water, transport, GATT Government Procurement Code. In the past, many energy, and telecommunications) to competitive EU member state governments have extended preferences bidding procedures, effectively terminating the to national suppliers. Ibid., p. 81. traditional preferences extended to national suppliers 100 Title VII of the Omnibus Trade and Competitiveness Act of 1988 requires the President to submit annual rep0rts to the Congress on the extent to 95 All non-agricultural tariff reductions are scheduled which countries discriminate against U.S. products or to occur within fom years of the implementation of the Uruguay Round Agreements. In addition to tariff services in their government procurement practices. The reductions, the URA also is expected to benefit U.S. U.S. Government reviews global procmement practices manufacturers through its market access provisions. every April. An early review took place in January 1992 Agreements to work toward harmonizing and simplifying on the procurement practices of the EU in rules of origin and to strengthen protection of intellectual telecommunications and heavy electrical equipment; this property rights also are expected to improve the trading report cited discriminatory practices. USTR, 1993 environment for U.S. companies. For further information, National Trade Estimate Report on Foreign Trade see USITC, Potential Impact on the U.S. Economy and Barriers, p. 86. Industries of the GAIT Uruguay Round Agreements (inv. 101 USTR, "USTR Factsheet: Title VII No. 332-353), Volume I, USITC publication 2790, June Announcement," press release supp., Feb. l, 1993. The 1994. delay was to allow time for U.S. and EU negotiators to 96 Industry officials, telephone interviews with USITC complete negotiations on the Government Procurement staff Mar. 1994. Code and parallel telecommunications negotiations. 97 Office of the United States Trade Representative 102 The EU has requested changes in U.S. (USTR}, 1990 National Trade Esti1111Jte Report on Foreign procurement practices before it considers revising its Trade Barriers, pp. 131-132; and USTR, 1992 National · Utilities Directive. The EU points to the price preferences Trade Estimate Report on Foreign Trade Barriers, p. 166. imposed by the Buy American Act and to practices of 98 For a complete text of this EU directive, see sub-federal procurement bodies as discriminating against Council Directive of 17 September 1990 .on the Procurement Procedures of Entities Operating in the EU firms. European Commission Delegation, "Progress Water, Energy, Transport and Telecommunications Sectors, Report on EU-US Relations," Office of Press and Public 90/531/EEC Official Journal of the European Affairs, Washington, May 1994; and U.S. Department of Communities, (OJ} No. L 297 (Oct. 29, 1990), pp. 1-47. State Telegram, Feb. l, 1993, Brussels, Belgium, message For more information on this directive and its ref. No. 01399. implications, see USITC, The Effects of Greater Economic 103 USTR, "Implementation of Sanctions With Respect /nJegration Within the European Community on the United to the European Community Pursuant to Title VII of the States: Fourth Followup Report (inv. No. 332-267), Omnibus Trade and Competitiveness Act of 1988," 58 USITC publication 2501, April 1992, p. 6-4. F.R. 31136, May 28, 1993.

21 which became effective May 28, 1993 and remains in Japan effect, prohibits U.S. federal agencies from procuring Japanese procurement of U.S. telecommunications products and services from eight EU countries.104 equipment has been the subject of numerous . This action is expected to affect an estimated $20 negotiations, bilateral agreements, and monitoring million wonh of EU goods and services annually and efforts. Nippon Telephone and Telegraph Corporation reportedly will remain in effect until an agreement is {NTT) was a government-owned monopoly until its concluded.105 privatization in 1985. NTT primarily purchased equipment from a "family" of Japanese suppliers.108 As part of the Tokyo Round Agreement, however, Korea Japan agreed to open procurement to foreign bidders. This commitment was strengthened in 1980 when the In 1989, the United States cited Korea for unfair United States and Japan signed the NTT Procurement trade practices regarding U.S. telecommunications Procedure Agreement, which called for national equipment and designated Korea as a priority country treatment for foreign firms responding to NTT's for telecommunications negotiations under section procurement requests. loo The United States and Japan 1374(a) of the Omnibus Trade and Competitiveness have since renewed this agreement on several Act of 1988. U.S. officials charged that Korean occasions.llO Telecommunications was also one of telecommunications carriers provide unfair preferences four sectors targeted for market-opening discussions in to national suppliers and impede imports through 1985.m In 1986, U.S. and Japanese officials reached nontransparent standards, testing, and certification a market-oriented, sector specific (MOSS) agreement procedures. During two years of negotiations, the addressing a number of telecommunications market United States and Korea concluded a series of access concerns.112 telecommunications agreements. In February 1990, the In spite of these agreements, difficulties in gaining United States and Korea concluded a bilateral access to Japan's market remain. Beginning in 1985, agreement that provides for the liberalization of the Motorola raised concerns over the issue of standards Korean telecommunications market.106 The agreement for cellular equipment. Japan effectively restrained provided U.S. firms with greater access, beginning in sales of Motorola's equipment by limiting the 1992, to telecommunications contracts to be awarded geographic areas that could be served by a carrier using by the Korean Office of Supply (OSROK), the Motorola's cellular standard. Progress was made in the Ministry of Communications, and the Korean 1989 Third Party Radio and Cellular Agreement, in Telecommunication Authority. Korea also agreed to which Japan agreed to allow access to its cellular include these entities in its GATT Procurement Code telephone and network equipment market: In spite of offer, which it formally submitted in June 1990. Korea this agreement, the designated Japanese carrier delayed also agreed to improve the transparency of its installation of Motorola's system, allowing time for standard-setting process.107 Japanese competitors to develop competitive handheld 104 The sanctions prohibit procurement of EU phones.113 Following threats of sanctions, 114 an telecommunications equipment and certain other types of products and services. The sanctions do not affect 108 Within this family of suppliers were NEC, Fujitsu, products covered by the GAIT Government Procurement Oki, Hitachi, and Matsushita. Code nor any products covered by defense or 109 This agreement largely was prompted by security-related agreements. USTR, "Implementation of Motorola's efforts to enter the Japanese market for pagers. Sanctions," 58 F.R. 31136, May 28, 1993. The sanctions 110 Although the agreement remains in place, U.S. do not affect U.S. purchases from Spain, Portugal, or firms continue to report difficulties in entering Japan's Greece, since those countries have not yet implemented public procurement market See USTR, 1994 National the directive. The United States no longer imposes Trade Estimate Report on Foreign Trade Barriers, p. 158. sanctions against Germany, since Germany agreed not to 111 In addition to telecommunications, discussions enforce Article 29 of the directive. USTR, were held on electronics, pharmaceuticals/medical "U.S.-Germany Announce Bilateral Agreement on equipment, and forestry products. Government Procurement," press release 93-38, June 10, 112 The MOSS agreement called for a reduction in the 1993. number of technical standards for radio equipment 105 Negotiations currently are stalemated, but are (receivers); simplification of the procedure for approval expected to resume in the future. U.S. Government and certification of equipment; abolition or simplification official, telephone conversation with USITC staff, June of certain restrictions on the entry of new corporations 1994. into the telecommunications market; opening of the radio 106 USTR, 1990 National Trade Estimate Report on communications service market; and transparency in Foreign Trade Barriers, pp. 131-132; and USTR, 1992 policy decision procedures. MPf, Telecommunications National Trade Estimate Report on Foreign Trade Market of Japan, Jan. 1992, p. 4. Barriers, p. 166. 113 USTR, "Fact Sheet on Origin and Implementation 107 USTR, 1990 National Trade Estimate Report on of the 1989 Cellular Telephone Agreement by Japan," Foreign Trade Barriers, pp. 131-132; and USTR, 1992 Feb. 1994. National Trade Estimate Report on Foreign Trade 114 USTR, "Statement of Ambassador Michael Barriers, p. 166. Kantor," press release 97-07, Feb. 15, 1994.

22 agreement was reached in early 1994 that specified a competitive with imports from Asia and other schedule for the completion of the cellular system.115 low-wage regions. Despite relatively low import U.S. firms' access to the Japanese market continues to penetration levels overall, however, U.S. subsidiaries. be reviewed every year under section 1377 of the of foreign firms producing telecommunications Omnibus Trade and Competitiveness Act of 1988. equipment in the United States hold significant shares of certain product markets. For example, although Motorola is the largest supplier of cellular telephones U.S. MARKET for the United States, cellular phones made by Japanese-based NEC and Oki are the second and third Consumption most widely available brands.117 In the PBX market, The U.S. market for telecommunications AT&T dominates with a 28 percent share, but is equipment is the largest in the world, reaching an followed by Canadian-based Northern Telecom (25 estimated $34.1 billion in 1993 (see table 5). During percent) and European-based Rolm/Siemens 1989-93, the fastest growing sectors of the market (15 percent). ll8 Among vendors of central office included emerging technology equipment, 116 call and switches, AT&T again dominates with a 42 percent voice processing equipment, fax equipment, and share of the U.S. market, but Northern follows with 39 mobile communications equipment (see table 6). For percent and Ericsson holds a 6 percent share. The 1994-97, the fastest growing market segments are success of foreign companies is largely due to the projected to be network equipment, fax equipment, and relative openness of the U.S. telecommunications call and voice processing equipment. market The import penetration level for the industry as a whole has increased slightly in recent years, reaching Production an estimated 25 percent in 1993. On a sector level, import penetration is higher in customer premises U.S. production of telecommunications equipment equipment than in network equipment. High wages and totalled $35 billion in 1993 (see table 5).119 Figure 6 technological expertise make the United States best shows the breakdown of shipments by sector. Wireline suited for the manufacture of more sophisticated switching and transmission equipment accounted for products, such as network equipment. By contrast, in 19 percent and 10 percent of the total, respectively. the price sensitive market for CPE equipment, productS manufactured in U.S. factories tend to be less price 117 NATA, Market Review 1994, pp. 91. The same is true for pagers. Motorola holds 86 percent of the U.S. market for pagers, but NEC is in second place (10 percent) and Uniden and Panasonic make up the US USTR, "United States - Japan Arrangement on remainder. Ibid., p. 100. Cellular Telephone Systems," Mar. 12, 1994. 118 NATA, Market Review 1994, p. 153. 116 The emerging technology market includes frame 119 U.S. Department of Commerce data. This figure relay equipment, Tl and T3 multiplexers, and fiber optic encompasses SIC product codes 36611 (switching and equipment. This type of equipment is necessary to switchboard equipment), 36613 (carrier line equipment operate advanced services, such as packet switching, and moderns), 36614 (other telephone equipment and frame relay service, and ATM service. NATA, Market components), 36631 (mobile/cellular systems equipment) Review 1994, p. 108. and 36693 (intercommunications systems).

Tables Telecommunlcatlons equipment: U.S. producers' shipments, exports of domestic merchandise, Imports for consumption, and apparent consumption, 1989-93 Ratio of Producers' Apparent Imports to Year shipments1 Exports Imports consumption consumption

Million dollars Percent 1989 ...... 29,127 4,973 6,518 30,672 21.3 1990 ...... 30,846 6,220 6,545 31,171 21.0 1991 ...... 31,456 6,568 6,853 31,741 21.6 1992 ...... 33,678 7,720 7,882 33,840 23.3 1993 ...... 35,025 9,571 8,692 34,146 25.5 1 Estimated by the staff of the U.S. International Trade Commission. Source: Compiled from official statistics of the U.S. Department of Commerce, except as noted.

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24 ▪

Figure 6 Telecommunications equipment: U.S. shipments by product type, 1992

Wireline Transmission Equipment 10.4%

Pagers and Cellular Phones 11.4%

Mobile Network Equipment 35.1%

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Source: Compiled from official statistics of the U.S. Department of Commerce.

Customer premises equipment accounted for 24 equipment (e.g., fax machines and cordless percent of the total, while mobile communications telephones). Imports of high-end network equipment systems 120 and cellular equipment accounted for 35 (including switching and transmission equipment) percent and 11 percent of the total, respectively. Within accounted for less than 20 percent of total imports. the CPE sector of the industry, most shipments were in Reflecting the growth of the industry overall, higher-end, software-intensive product areas, such as imports increased at an average annual rate of 7.5 data communications equipment and voice processing percent between 1989 and 1993. Imports of cordless equipment. phones and fax machines increased by more than 100 The sectors experiencing the highest growth rates percent during 1992-93, while imports of cellular in terms of shipments are newer products used to telephones increased by over 70 percent. Imports of enhance the productivity of businesses and/or to CO switches, PBXs, and key systems declined by 8 transmit data, such as videoconferencing products. percent on average during 1989-93. Each of these sectors grew at compound annual growth In 1993, the major suppliers to the U.S. market rates of between 20 and 40 percent during 1991-92. were Japan, Canada, China, Malaysia, Taiwan, and Imports Mexico. The high level of imports from Mexico and East Asia principally reflects their competitive U.S. imports of telecommunications equipment advantage in the manufacture of low-end, reached $8.7 billion in 1993 (see table 7). While the price-sensitive customer premises equipment, such as United States imports products in every segment of the telephone sets and answering machines. Japan and industry, the largest share of imports, over 80 percent, Canada are large suppliers of telecommunications parts is accounted for by low-end customer premises for the U.S. market. Some suppliers to the U.S. market,

120 Includes satellites, radio base station equipment, such as Canada, Malaysia, Mexico, the Philippines, and other communications systems. Israel, and Thailand, enjoy duty-free status for most of

25 Table7 Telecommunlcatlons equipment: U.S. Imports for consumption, by principal sources, 1989-931 Source 1989 1990 1991 1992 1993 Value (million dollars) Japan •...... •...... 2,498 2,192 2,266 2,569 2,842 Canada ...... 650 777 825 1,005 1,210 China ...... 314 416 492 564 776 Malaysia ...... •...... 264 419 531 643 678 Taiwan ...... 460 413 361 473 411 Mexico ...... 151 164 194 258 388 Philippines ...... •..... 93 125 149 212 304 Israel ...... 133 118 147 249 294 Thailand ...... 78 142 217 273 284 Korea ...... •...... • 474 384 309 303 280 All other .•...... 1,403 1,394 1,363 1,331 1,225 Total ...... 6,518 6,545 6,853 7,882 8,692 1 Includes imports of telecommunications equipment classified in the HTS categories listed in table 3. Note.-Due to rounding, figures may not add to the totals shown. Source: Compiled from official statistics of the U.S. Department of Commerce.

their telecommunications shipments. In 1993, 32 America. U.S. firms are well-positioned to take percent of U.S. telecommunications equipment imports advantage of new market opportunities for two entered duty free. 121 reasons. First, U.S. suppliers have been exposed to competition since the early 1980s and have competed within a relatively large and demanding domestic FOREIGN MARKETS market This experience provides an advantage over some suppliers that only recently have encountered Foreign Market Profile competition in their home markets. Second, many opportunities exist for products that incorporate Export opportunities are expanding as foreign cutting-edge technology and advanced software (e.g .• telecommunications service markets are liberalized, as satellites, digital switches, data communications countries modernize existing telecommunications equipment), areas in which U.S. suppliers excel. This infrastructures or build new ones, and as new services section reviews the types of opportunities that exist in (e.g., PCS and multimedia) create demand for new both developed markets, such as Western Europe, equipment Table 8 shows low or negative market Japan, and Canada, and in emerging markets, such as growth rates between 1990 and 1993; however, Central Europe, China, and Latin America. - analysts expect higher growth rates between 1993 and 1996 as emerging markets expand and modernize Western Europe infrastructures and as demand in developed countries While the telecommunications infrastructure in grows for mobile communications and other new Western Europe is already well-developed, two trends services suggest new opportunities for U.S. telecommunications equipment suppliers over the long term. First, as an Canada, Mexico, Japan, and the European Union increasing number of European countries open their are important markets for U.S. telecommunications markets, opportunities for foreign suppliers likely will equipment. In addition to these established markets, grow.122 Second, the market for mobile telecom­ however, U.S. manufacturers are also targeting munications is continuing to expand across Europe. emerging markets in Central Europe and Latin In spite of these long-term opportunities, demand 121 Mexico, Canada, Israel, GSP countries, CBERA for telecommunications equipment in Western Europe countries, and Andean Trade Pact countries enjoy duty likely will remain weak for the short term due to slow free status for the majority of their telecommunications shipments to the United States. GSP refers to the economic growth. The anticipated average annual Generalized System of Preferences; for a complete listing of these countries, see the Harmonized Tariff Schedule of 122 Industry official, telephone interview with USITC the United States. CBERA refers to the Caribbean Basin staff, Mar. 3, 1994. Industry analysts note that the EU Economic Recovery Act. Countries of the Andean Trade market would have expanded more rapidly for foreign Preference Act include Bolivia, Colombia, Ecuador, Peru, suppliers if an agreement had been reached on the issue and Venezuela. See Appendix A, ''Tariff and Trade of government procurement. Ibid., Mar. 1994. See Agreement Terms," for further explanation. section on Foreign Nontariff Measures.

26 Table a Telecommunlcatlons equipment: International markets for selected products, 1990-961 CAGR3 CAGR3 1990 1991 1992 19932 19942 19952 19962 '90-93 '93-96 Million dollars -- Percent-- Western Europe ...... •...•....•...... 26,952 27,254 26,838 26,976 27,355 27,829 28,282 0.0 1.6 Japan .•...... •.•...... •...... 11,110 11,956 10,281 9,na 9,867 10,059 10,267 -4.2 1.6 Mexico ...... 2,330 2,382 2,466 2,564 2,667 2,757 (4) 3.2 53,7 Canada ...•..•...... ••••..•...... 2,032 2,000 1,957 1,939 1,974 1,991 1,974 -1.5 0.6 ASEAN countries ...... 1,592 1,671 1,714 1,n3 1,841 1,901 1,951 3.7 3.2 Central Europe •...... •..... 1,388 1,319 1, 141 1,545 1,667 1,810 1,997 3.6 8.9 Korea •...... •.•...... •.... 1,454 1,507 1,490 1,460 1,450 1,435 1,420 0.1 -0.9 Brazil ...... _...... 1,324 1,290 1,200 1,160 1,180 1,200 1,220 -4.3 1.7 China •..•...... •..•...... 900 950 1,000 1,050 1,100 1, 150 (4) 5.3 54,7 India ...... 631 537 480 502 520 542 564 -7.3 4.0 Venezuela ...... •.....•...... •...... 140 147 154 161 164 167 170 4.8 1.8

1 Includes HTS headings 8517 and 8520. 2 Data for 1993-96 are estimated. 3 Compound annual growth rate. 4 Not available. 5 CAGR for 1993-95. Source: Elsevier, Yearbook of World Electronics Data 1993.

~ growth rate of the market is just 2 percent during NAFTA, which became effective January 1, 1994, 1993-96.123 The market for fiber optic equipment also is expected to result in increased U.S. exports to reportedly is saturated, although opportunities for other Canada. Although the 1989 Canadian Free-Trade types of transmission equipment, such as line terminals Agreement (CFTA) already had eliminated tariffs on and multiplexers, appear promising. The market for telecommunications equipment, cumbersome rules of cellular equipment is expected to expand more rapidly origin prevented U.S. companies from taking full than the overall market. Motorola remains the advantage of the new trading environment. The rules of dominant supplier of cellular phones for Europe origin found in the NAFTA, however, are considerably (30 percent share) followed by Ericsson, Siemens, and clearer. U.S. companies are optimistic that NAFTA's Nokia.124 simplified rules of origin will be beneficial for U.S. exporters to the Canadian market.128

Canada Japan As competition expands in the Canadian market, new opportunities are created for U.S. exports. Two The United States exports over $500 million in recent events have contributed to this trend. First, the telecommunications equipment to the Japanese market Canadian Radio-Television and Telecommunication annually. Although Japan currently is trying to recover Commission (CRTC) opened Canada's long distance from a recession, it continues to be an important services to competition· in 1992. The introduction of a market for many types of U.S. telecommunications new long-distance carrier, Unite!, to compete with Bell equipment, particularly cellular equipment. The Canada (BC) resulted in increased opportunities for cellular communications industry has not been both domestic and foreign equipment suppliers. AT&T adversely affected by the economic slowdown in acquired a 20 percent share of Unite! in early 1993, Japan, and U.S. manufacturers enjoy a strong thus establishing a foothold for its technology and competitive position in the Japanese market. The equipment in Canada.125 decision by the Ministry of Posts and Telecommunications (MP1) to liberalize the Japanese The second opportunity for U.S. equipment manufacturers stems from the termination of the Bell digital cellular service market, coupled with the Canada-Northern Telecom "preferred-supplier" country's enthusiasm for mobile communications, has relationship. For 55 years this relationship allowed BC, led to expanded opportunities for suppliers of mobile which controls 60 percent of the Canadian equipment.129 Japanese manufacturers of cellular telecommunications market, to seek proposals from phones (NEC and Fujitsu) and pagers (NEC and Northern before turning to outside suppliers for its Matsushita) will therefore encounter renewed equipment purchases. U.S. companies reported that this competition in the cellular market from U.S. firms.130 relationship made it extremely difficult to compete in the Canadian market, particularly in the area of In addition to the growing cellular market, two new network equipment.126 Following considerable debate telecommunications projects in Japan could increase over the issue, U.S. and Canadian officials reached an opportunities for U.S. companies. Proposals for an understanding. Effective March 31, 1994, the Canadian "Info-Communications Services Infrastructure" and a Government agreed to have the CRTC ensure Personal Handy-phone System (PHS) system resemble competitive procurement practices by Bc.121 U.S. U.S. strategies for an information superhighway and manufacturers, already competitive with Northern's PCS system, respectively. Based on U.S. strengths in telecommunications products in the United States, both fiber optics and wireless equipment, U.S. expect to expand their share of the Canadian market. companies are considered to be well-positioned to 123 U.S. Department of Commerce, International Trade respond to demands created by these projects.131 Administration (ITA), Report on European Telecommunications Market 1993, Market Research 128 Industry official, telephone interview with USITC Re1'9rts, Nov. 12, 1993. staffi Oct. 5, 1993. 124 Department of Commerce, ''Telecommunications 29 Japan has chosen a digital cellular standard similar Market Overview," Market Research Report, Nov. 1993. to the TDMA slandard. U.S. manufacturers should benefit 125 Unitel is placing powerful AT&T switches in from similar siandards, though it will also benefit Toronto, Vancouver, and Montreal. Daniel Briere, "AT&T Japanese manufacturers wishing to penetrate the U.S. and MCI Head North of the Border," Network World, May market. 3, 1993, p. 22. 130 Department of Commerce, "Japan: Communications 126 Industry official, telephone interview with USITC Equiwient Imports," Market Research Report, July 1993. staff Sept. 29, 1993. 1 1 Some U.S. firms report disappointment with N1T's i21 USTR, "Statement by United States Trade limited foreign procurement related to Japan's information Representative Michael Kantor on the Termination of the highway, especially since fiber optic technology is an area Bell Canada/Northern Telecom "Preferred-Supplier" in which U.S. firms excel. USTR, 1994 National Trade Relationship," Mar. 29, 1994. Estimate Report on Foreign Trade Barriers, p. 159.

28 Central Europe and the Former Soviet to double international calling capacity. Likewise, Union Central European Cities are constructing new digital switches and installing fiber optic cables to reduce the Opportunities for U.S. telecommunications strain on existing analog networks.137 Western companies abound in Central Europe and the former companies have been slower to invest outside of Soviet Union. Existing wireline infrastructures in this metropolitan cities, due to high risk and low profit region are limited, with only 11 to 15 lines per 100 potential. people (compared to 43-50 lines per 100 people in Western Europe and the United States).132 The Soviet Because of the delay and high cost associated with equipment used to create these networks is improving wireline networks, most private investment long-outdated,133 and financial resources required for has been in wireless communicatioris. Across Russia, upgrades and replacement parts are scarce. the Baltics, and Central Europe, mobile networks are Consequently, the countries of Central Europe and the expanding rapidly, providing an interim solution to the former Soviet Union are working to improve the region's antiquated communications infrastructure. situation through two methods. First, local telecom Western companies are eager to supply these markets authorities are forming joint ventures with many for several reasons.138 First, telecom joint ventures Western companies in order to update existing wireline provide a foothold in what is eventually expected to be systems. Second, many countries are installing cellular a lucrative market Second, these countries provide an systems as a faster and less expensive method of outlet for older generation products, such as analog developing a nation-wide telecommunications cellular phones.139 And finally, returns for service infrastructure.134 providers are large since, for many subscribers, the cellular phone is their sole source of Joint ventures have been formed in Moscow and communication.140 St. Petersburg to provide international wireline 135 connections for businesses. Western companies Cellular systems have been installed in Central participating in these ventures include Alcatel, GTE, Europe and the former Soviet Union primarily through and British Telecom.136 US West has cooperated with partnerships between local governments and foreign the Russian Ministry of Telecommunications and service providers. WesTel, a venture between US West Intertelecom (a joint venture among regional operators) and the Hungarian Telephone Company, received the to install two digital switches in Moscow and one in St. first license for mobile operation in the region in 1989. Petersburg. These switches will service 4,500 and Today, there are 11 mobile systems in operation, 3,000 lines, respectively, and are expected serving over 60,000 subscribers in Central Europe. The 132 L. Ron Schultz, "Hello Russia; Welcome to the U.S. RHCs have been particularly successful in 21st Century of Telecom," TE&M, June l, 1993, p. 57. winning licenses in these regions, primarily because of In the former Soviet Union, only 14 percent of the population own telephones, compared to nearly 92 percent their experience competing in the privatized U.S. in the United States. Ibid., p. 57. market.141 133 These networks contain electromechanical or step-by-step switches, and most are capable only of analog 137 Equipment for these networks is being supplied by transmission. Schultz, "Hello Russia," p. 57; and U.S. AT&T, Siemens, Ericsson, Northern, and Alcatel. Department of Commerce, ITA, Telecom Guide to the NJS, 138 For more information on the subject of mobile Market Research Report, Aug. 26, 1993. systems and joint ventures in Central Europe, see USITC, 134 Some analysts predict that construction and "The Success of Cellular Communications in Eastern modernization of fixed wireline networks in this region Europe and the Former Soviet Union," /nduStry, Trade, will require investments of approximately $100 billion and Technology Review, Feb. 1993, p. 1. over the next two decades. "Eastern Europe Poised for 139 While digital equipment is making its way to this Quantum Leap," Financial Times Survey: World Telecommunications, Oct. 7, 1991. Further, while some region of the globe, price considerations have led most countries to install, at least for the time being, analog regions might be forced to wait several years for line installment, a mobile link can be constructed within a day. equiJTo1ent. Mark Newman, "Only the Elite Can Afford Such Prices," 40 Although some subscribers use mobile phones to Financial Times Survey, Mobile Communications, Sept. 8, supplement existing (but overloaded) wireline services, 19931. p. xii. many use the cellular system as a substitute for wireline, i.,s As foreign telecommunications companies enter thus average usage in minutes per month generally is the market, most concentrate on the establishment of higher among Central European subscribers than among digital overlay networks and business bypass services. Western users. Usage in Central Europe averages 250 136 Many of the equipment contracts for these joint minutes per month and is estimated to be 2 to 3 times ventures have been awarded to European manufacturers. higher than in Western Europe. U.S. companies hope to become more active, however, 141 Steven Titch, "Eastern Europe Warms to U.S. now that the export restrictions on optical fiber and digital Telcos," Telephony, Mar. 11, 1991, p. 9. US West is now switching equipment have been removed. These final the partner of PTTs in 5 markets: Hungary, the Czech restrictions were lifted in March 1994. Industry official, Republic, Slovakia, Moscow, and St. Petersburg. telephone interview with USITC staff, Feb.-Mar. 1994. Newman, "Only the Elite," p. xii.

29 China and East Asia currently debating between the GSM and CDMA standards.143 China and East Asia are increasingly promising Other countries in Asia, further along than China in markets for all types of telecommunications terms of line penetration ratios (see table 9), also are equipment While many countries in this region are working to expand and modernize telecommunications still trying to expand basic services, many also are infrastructure. Most perceive modem communications updating current structures with new digital and mobile systems as the key to becoming global business technologies. Table 9 shows that the line penetration centers, and are improving their infrastructure levels for these countries are relatively low. China, accordingly. 144 Taiwan and Korea recently have with its population of over one billion people and a line opened their doors to foreign competition. In many ·penetration of less than 2 telephones per 100 cases, local production and joint venture arrangements inhabitants, provides one of the largest potential are prerequisites for sales in these countries. Korea markets for telecommunications equipment suppliers. opened its telecommunications equipment procurement In an effort to improve the country's severely limited to foreign competition in 1993; AT&T won a 19.2 infrastructure, China has undertaken a program to have percent share of Korea's first international 100 million phone lines in operation by the year procurement 145 2000.142 China's Ministry of Post and Telecom­ munications {MPT) also is working to modernize the Mexico and other Latin American Countries country by expanding backbone trunk facilities, installing digital switches in major urban areas, and Increasing opportunities for U.S. suppliers of installing five fiber optic arteries to connect Beijing to telecommunications equipment in Mexico have other cities. resulted from: (1) privatization of TELMEX (the Mexican telephone company), (2) programs to Many foreign suppliers are taking advantage of the modernize Mexico's infrastructure, and (3) imple­ opportunities provided by these infrastructure mentation of NAFTA. These developments should programs. These programs provide a growing market ensure continued and expanding opportunities for U.S. for switch manufacturers, cellular phone producers, which have been the dominant supplier of manufacturers, and optical fiber suppliers. China's Mexico's cellular and wireline equipment for the past dominant switching equipment suppliers include several years. Alcatel, Ericsson, Northern, Siemens, NEC, Fujitsu, The market for wireline equipment in Mexico and AT&T. AT&T received permission in 1993 to exceeds $2 billion annually. As the country strives to establish a joint venture in Qingdao to manufacture update its infrastructure with digital and fiber optic switches. In the mobile phone market, the major equipment over the next few years, demand for suppliers are Ericsson, Motorola, and Siemens. wireline equipment is expected to increase at an Although there are currently less than 300,000 average annual rate of 10 percent. The country, which subscribers of mobile services in China, analysts expect this sector to enjoy growth similar to that seen 143 U.S. Department of Commerce, ITA, China Moving to Digital Cellular Systems, Market Research in developed countries, especially as business R~rt. Oct. 8, 1993. opportunities expand. Motorola is presently the 144 Taiwan plans to add over 7 million digital local dominant supplier of analog cellular phones in Beijing. lines and over 500,000 digital trunks in the next 4 years. Korea, which has increased its installed base of lines The city plans to shift to a digital cellular system and is aggressively, plans to add another 8.7 million lines and replace analog switches with digital systems. Achmad M. 142 As of mid-1993, the cmmtry had 17 million lines Chadran, "East Asia: Opportunity is Knocking," Telecom installed. Lynne Cuny, "100 Million Lines by Year 2000, Asia, June 1993, pp. 15-16. China's Telephone Target," Financial Times, Oct. 18, 145 Kim Nak-Hieon, "AT&T breaks into Korean 1993. Telecom Market," Electronics, Aug. 23, 1993, p. 10.

Table9 Asia: Main line penetration per 100 inhabitants, 1992

Country Main lines (thousands) Population (millions) Penetration

China ...... 11,469.1 1,175.7 0.98 Korea ...... 15,865.1 43.7 36.34 Taiwan ...... 7,418.3 20.8 35.75 Hong Kong ...... 2,819.8 5.8 48.62

Source: International Telecommunication Union (ITU), World Telecommunication Development Report 1994, pp. A-1 to A-3.

30 currently has less than 8 lines per 100 inhabitants, noted for its quality and proximity, some European and expects to have over 10 lines per 100 by the end of Japanese suppliers of mobile equipment are also 1995. To date, U.S. suppliers have accounted for just making inroads. under half of the import market share for these products (47 percent in 1992). Other major suppliers to U.S. Exports the Mexican market include Japan (14 percent in While U.S. companies ship all types of 1992), Sweden (11 percent) and France (4 percent). telecommunications products, most exports are in the U.S. products do very well in the Mexican market due area of network equipment (e.g., switches, parts of to the geographical proximity of U.S. suppliers, high switches, satellites, fiber optics, coaxial cable, and line quality of U.S. products, rapid delivery time, and systems). Overall, exports grew at an average annual availability of technical assistance.146 Prospects for rate of 18 percent during 1989-93, reaching $9.6 suppliers of switching equipment, modems, and fiber billion in 1993. Notable increases during this period optic cable are regarded as particularly promising. included central office switches (56 percent), In the mobile equipment market, prospects for U.S. transceivers for radiotelephony (29 percent), fiber suppliers are also favorable. This market has been optics (23 percent), satellites (9 percent), and satellite growing at an annual rate of 6 percent in recent years, parts (13 percent). With respect to customer premises reaching $72.2 million in 1992. Growth in this market equipment, U.S. exports of PBXs and modems is expected to continue as improving economic increased by 74 percent and 12 percent, respectively. conditions in Mexico lead to an increase in subscribers, Exports of certain CPE products declined during this and as traditional wireline communications systems are period, including key systems (67 percent), unable to keep up with communications demand. There (13 percent), and telephone sets (9 percent). is no domestic production of cellular equipment in Primary export markets include Canada, Mexico, Mexico. U.S. suppliers have been responsible for over Japan, China, and the United Kingdom (see figure 7). 60 percent of the country's imports of cellular products Exports to China and Russia have expanded rapidly in since the service's inception in September 1989. recent years, increasing by 99 percent and 232 percent, Mexican purchasers cite compatibility, price, quality, respectively, during 1992-93. This reflects efforts by availability, and access to suppliers as the primary U.S. companies to participate in both countries' reasons to purchase U.S. products.147 infrastructure expansion programs. Other growing As noted earlier, NAFfA eliminated tariffs for markets include Latin America, where U.S. exports to most U.S. telecommunications exports to Mexico. In Brazil and Argentina increased by 124 percent and 51 IO years, all tariffs on telecommunications goods are to percent, respectively. be eliminated (see section on tariff treatment). Opportunities for U.S. exports of telecommunications equipment to other Latin U.S. TRADE BALANCE American countries are expanding as these countries For the first time in IO years, the U.S. trade liberalize markets and modernize their infrastructures. balance in telecommunications equipment showed a Many telecommunications monopolies in these surplus in 1993 (see table IO and figure 8). Exports countries are being eliminated and many governments increased by 24 percent during 1992-93, shifting the have implemented 4- to 5-year plans to modernize balance from a deficit of $162 million in 1992, to a infrastructure.148 The largest growth prospect for U.S. surplus of $879 million in 1993. The increase in suppliers is in the area of mobile communications. exports is largely accounted for by high-end network Most Latin American companies have no domestic equipment, where the United States traditionally production of mobile equipment, leaving the market maintains a surplus. The United States continues to open to foreign suppliers. Brazil has the largest maintain a deficit in most customer premises categories telecommunications market in Latin America; over 30 (see figures 9 and IO). percent of Brazilian telecommunications imports are of U.S. origin. Although U.S. equipment continues to be Differences in the pace and extent of domestic and foreign market liberalization underlie changes in the 146 U.S. Department of Commerce, The U.S. trade balance over time. Less liberalized markets Telecommunications Equipment Market in Mexico, Market overseas historically limited opportunities for exports Research Report, Jan. 1993. 147 U.S. Department of Commerce, ITA, The Cellular from countries producing telecommunications Telecommunication Equipment Market in Mexico, Market equipment. Meanwhile, because the United States Research Report, Feb. 1993. maintained one of the most open markets during the 148 Chile was the first Latin American country to abolish the state monopoly on telecommunications past decade, a disparity in trade flows emerged. services. Consequently, U.S. imports of telecommunications

31 Figure 7 Telecommunications equipment: Top 10 U.S. export markets, 1993 Hong Kong 2.5%

China6.1%

Canada 14.4%

Source: Compiled from official statistics of the U.S. Department of Commerce.

Figure 8 Telecommunications equipment: U.S. exports and Imports, 1989-93

Ill Exports 5.0 6.2 6.6 7.7 9.6 I Imports 6.5 6.5 6.9 7.9 8.7 ~ Trade Balance -1.5 -0.3 -0.3 -0.2 0.9

Source: Compiled from official statistics of the U.S. Department of Commerce.

32 Table 10 Telecommunlcatlons equipment: U.S. exports of domestic merchandise, Imports for consumctlon, and merchandise trade balance, by selected countries and country groups, 1989-931 (Million dollars) Item 1989 1990 1991 1992 1993 U.S. exports of domestic merchandise: Japan ...... " ...... 519 571 693 554 821 Canada ...... 502 744 831 1,183 1,381 China ...... 63 102 110 295 585 Mexico ...... 558 643 768 950 964 Malaysia ...... 37 42 63 91 125 Taiwan ...... 216 399 244 316 309 United Kingdom ...... 621 509 394 476 559 Korea ...... •. 182 221 280 304 393 Israel ...... 136 108 109 106 172 Germany ...... 136 353 279 284 273 All other ...... 2,003 2,527 2,798 3,161 3,988 Total ...... 4,973 6,220 6,568 7,720 9,571 EU-12 ...... 1,167 1,386 1,447 1,624 1,715 OPEC ...... 186 182 339 390 458 ASEAN ...... 232 308 355 604 622 CB ERA ...... 88 98 97 108 137 Central Europe ...... 7 12 44 67 105 U.S. imports for consumption: Japan...... 2,498 2,192 2,266 2,569 2,842 Canada ...... 650 777 825 1,005 1,210 China ...... 314 416 492 564 776 Mexico ...... 151 164 194 258 388 Malaysia •...... 264 419 531 643 678 Taiwan ...... 460 413 361 473 411 United Kingdom ...... 99 107 139 194 125 Korea ...... 474 384 309 303 280 Israel ...... 133 118 147 249 294 Germany ...... 105 109 138 142 148 All other ...... 1,369 1,445 1,452 1,480 1,540 Total ...... 6,518 6,545 6,853 7,882 8,692 EU-12 ...... 391 365 505 600 545 OPEC ...... 1 5 47 68 95 ASEAN ...... 910 1,153 1,271 1,464 1,547 CB ERA ...... 11 5 9 10 14 Central Europe ...... (2) (2) (2) (2) (2) U.S. merchandise trade balance: Japan ...... -1,980 -1,620 -1,573 -2,015 -2,021 Canada ...... -148 -33 6 178 170 China ...... -251 -314 -382 -269 -191 Mexico ...... 407 479 574 692 576 Malaysia ...•...... -228 -377 -468 -551 -553 Taiwan ...... -245 -14 -117 -157 -102 United Kingdom ...... 521 401 255 282 434 Korea ...... -292 -163 -28 1 113 Israel ...... 5 -11 -38 -143 -121 Germany ...•...... 31 244 141 142 124 All other ...... 634 1,082 1,346 1,681 2,449 Total ...... -1,545 -325 -285 -162 879 EU-12 ...... 776 1,022 942 1,024 1,170 OPEC ...... 185 171 292 322 362 ASEAN ...... -678 -845 -916 -860 -924 CB ERA ...... 77 92 88 99 112 Central Europe ...... 7 12 44 67 105 1 Import values are based on customs value; export values are based on f.a.s. value, U.S. port of export. U.S. trade with East Germany is included in "Germany" and in EU-12 but not in "Central Europe". 2 Less than 500,000 dollars. Note.-Oue to rounding, figures may not add to the totals shown. Source: Compiled from official statistics of the U.S. Department of Commerce.

33 Figure 9 Telecommunlcatlons network equipment: Selected U.S. exports and imports, 1993 Network equipment

Switches

Satellites ~ Exports - Imports Optical fiber/cable

Coaxial cable

Line systems

Repeaters

0 200 400 600 800 1000 1200 1400 1600 Million dollars

Source: Compiled from official statistics of the U.S. Department of Commerce.

Figure 10 Telecommunications customer premises equipment: Selected U.S. exports and Imports, 1993. Customer Premises Equipment

Intercoms ~ Exports - Imports Key systems

Handsets

0 200 400 600 800 1000 1200 Million dollars Source: Compiled from official statistics of the U.S. Department of Commerce.

34 equipment exceeded exports for many years and Between 1989 and 1993, exports increased at an resulted in a significant trade deficit for the sector. In average annual rate of 18 percent, while imports recent years, however, an increasing number of foreign increased at an annual rate of only 8 percent The countries have opened markets to U.S. exports. growth in exports was led by increased shipments of high-end telecommunications equipment parts, radio Further, many overseas markets are updating network transceivers, satellites, and central office switches infrastructure with sophisticated equipment, much of Imports have increased at a slower pace. Some which is produced in the United States. As a result of attribute this to efforts by U.S. service providers to these two trends, U.S. exports have been expanding reduce capital outlays during the recession. While more rapidly than U.S. imports over the past 5 years, imports from most major trading partners increased decreasing the overall deficit and creating a surplus in during 1989-93, U.S. imports from Korea and Taiwan 1993. declined by 12 percent and 3 percent, respectively.

35

APPENDIX A TARIFF AND TRADE AGREEMENT TERMS The Harmonized Tariff Schedule of the United to developing countries in the Caribbean Basin States (HTS) replaced the Tariff Schedules of the area to aid their. economic development and to United States (TSUS) effective January 1, 1989. diversify and expand their production and Chapters 1 through 97 are based upon the exports. The CB ERA, enacted in title II of Public internationally adopted Harmonized Commodity Law 98-67, implemented by Presidential Description and Coding System through the Proclamation 5133 of November 30, 1983, and 6-digit level of product description, with amended by the Customs and Trade Act of 1990, additional U.S. product subdivisions at the 8-digit applies to merchandise entered, or withdrawn level. Chapters 98 and 99 contain special U.S. from warehouse for consumption, on or after classification provisions and temporary rate January 1, 1984; this tariff preference program provisions, respectively. has no expiration date. Indicated by the symbol "E" or "E*" in the special subcolumn of column Rates of duty in the general subcolumn of HTS l, the CBERA provides duty-free entry to eligible column 1 are most-favored-nation (MFN) rates; articles, and reduced-duty treatment to certain for the most part, they represent the final other articles, which are the product of and concession rate from the Tokyo Round of imported directly from designated countries, as Multilateral Trade Negotiations. Column set forth in general note 7 to the HTS. I-general duty rates are applicable to imported goods from all nonembargoed countries except Preferential rates of duty in the special subcolumn those enumerated in general note 3(b) to the of column 1 followed by the symbol "IL" are HTS-Afghanistan, Azerbaijan, Cuba, applicable to products of Israel under the United Kampuchea, Laos, North Korea, and States-Israel Free Trade Area lmplementadon Vietnam-whose goods are dutiable at the rates Act of 1985 (IFfA), as provided in general note 8 set forth in column 2. Goods from Albania, to the HTS. Where no rate of duty is provided for Armenia, Belarus, Bosnia, Bulgaria, the People's products of Israel in the special subcolumn for a Republic of China, Croatia, the Czech Republic, particular provision, the rate of duty in the general Estonia; Georgia, Hungary, Kazakhstan, subcolumn of column 1 applies. Kyrgyzstan, Latvia, Lithuania, Macedonia, Moldova, Mongolia, Poland, Romania, Russia, Preferential nonreciprocal duty-free or Slovakia, Slovenia, Tajikistan, Turkmenistan, reduced-duty treatment in the special subcolumn Ukraine, and Uzbekistan are now eligible for of column t · followed by the symbol "J" or "J*" MFN treatment. Among goods dutiable at in parentheses is afforded to eligible articles the column I-general rates, particular products of product of designated beneficiary countries under enumerated countries may be eligible for reduced the Andean Trade Pr(!ference Act (ATPA), rates of duty or for duty-free entry under one or enacted in title II of Public Law 102-182 and more preferential tariff programs. Such tariff implemented by Presidential Proclamation 6455 treatment is set forth in the special subcolumn of of July 2, 1992 (effective July 22, 1992), as set HTS column 1. Where eligibility for special tariff forth in general note 11 to the HTS. treatment is not claimed or established, goods are Preferential rates of duty in the special subcolumn dutiable at column I-general rates. of column 1 followed by the symbol "CA" are applicable to eligible goods of Canada, and those The Generalized System of Preferences (GSP) followed by the symbol "MX" are applicable to affords nonreciprocal tariff preferences to eligible goods of Mexico, under the North developing countries to aid their economic American Free Trade Agreement, as provided in development and to diversify and expand their general note 12 to the HTS, effective January l, production and exports. The U.S. GSP, enacted in 1994. title V of the Trade Act of 1974 and renewed in the Trade and Tariff Act of 1984, applies to Other special tariff treatment applies to particular merchandise imported on or after January 1, 1976 products of insular possessions (general note and before September 30, 1994. Indicated by the 3(a)(iv)), goods covered by the Automodve symbol "A" or "A*" in the special subcolumn of Products Trade Act (APfA) (general note 5) and column l, the GSP provides duty-free entry to the Agreement on Trade in Civil Aircraft eligible articles the product of and imported (ATCA) (general note 6), and articles imported directly from designated beneficiary developing from freely associated states (general note 10). countries, as set forth in general note 4 to the HTS. The General Agreement on Tariffs and Trade (GATT) (61 Stat. (pt. 5) A58; 8 UST (pt. 2) 1786) The Caribbean Basin Economic Recovery Act is a multilateral agreement setting forth basic (CBERA) affords nonreciprocal tariff preferences principles governing international trade among its

A-2 signatories. The GATI's main obligations relate Arrangement (MFA) provides a framework for to most-favored-nation treatment, the the negotiation of bilateral agreements between maintenance of scheduled concession rates of importing and producing countries, or for duty, and national (nondiscriminatory) treatment µnilateral action by importing countries in the for imported products; the GATI also provides absence of an agreement. These bilateral the legal framework for customs valuation agreements establish quantitative limits on standards, "escape clause" (emergency) actions, imports of textiles and apparel, of cotton and antidumping and countervailing duties, and other other vegetable fibers, wool, man-made fibers and measures. Results of GAIT-sponsored multilateral tariff negotiations are set forth by silk blends, in order to prevent market disruption way of separate schedules of concessions for each in the importing countries-restrictions that participating contracting party, with the U.S. would otherwise be a departure from GATI schedule designated as Schedule XX. provisions. The United States has bilateral agreements with many supplying countries, Officially known as "The Arrangement Regarding including the four largest suppliers: China, Hong International Trade in Textiles," the Multi.fiber Kong, the Republic of Korea, and Taiwan.

A-3

APPENDIXB UNITED STATES INTERNATIONAL TRADE COMMISSION TITLE VII INVESTIGATIONS RELATED TO TELECOMMUNICATION EQUIPMENT • ▪

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B-4 APPENDIXC GLOSSARY OF TERMS GLOSSARY OF TERMS

Advanced Mobile Phone Service (AMPS) An analog transmission technology which supports approximately 60 percent of the world's cellular subscribers and 100 percent of U.S. cellular subscribers. AMPS was developed by AT&T and became the basis for several other analog standards found in Europe, Japan, and emerging cellular markets. Analog Transmission The method of transmitting voice, video, and data electronically where signals correspond to the movement of the transmitted signal (similar to a continuously varying wave). The first generation of cellular communications service is based on analog technology. However, due to capacity limitations, analog systems are expected to be replaced by digital systems (see also digital transmission). Asynchronous Transfer Mode (ATM) ATM is a technology designed to rapidly and efficiently transmit digitized packets of voice, image, data, and full-motion video. Demand for networks capable of supporting multimedia applications is increasing as consumers expand their use of videoconferencing and data transmission. Many telecommunications equipment manufacturers are producing ATM switches to meet growing demand for these high-tech systems. Bell Operating Companies (BOCs) The 22 local telephone service companies that emerged following AT &T's divestiture on January 1, 1984. See also Regional Bell Holding Companies. Broadband Transmission A transmission facility that has a capacity (or ) capable of carrying more than just voice transmission. For example, coaxial cables carry voice, video, and data channels simultaneously. Cable companies' use of coaxial cables is enhancing their position as potential competitors in the market for broadband or multimedia services. Broadband PCS See Personal Communications Services. Cell A geographic subdivision of a cellular system's service area. Cells can vary in size depending on terrain, capacity demands, etc. Each cell is covered by its own low-power transmitter, receiver, and signaling equipment. See also microcell. Cellular Switch See switches. Central Office Switch See switches. Centrex Centrex is a business service provided by local phone companies. It offers such features as call forwarding, intercom, call transfer, and least cost routing. Centrex service is in direct competition with PBX equipment, which provides essentially the same features. Companies may select Centrex over in-house equipment (PBXs) to save space or to allow for easier expansion. BOCs' promotion of Centrex services in recent years has placed a great deal of price pressure on PBX systems.

C-2 Code Division Multiple Access (CDMA) A digital cellular transmission technology that separates call packets and scatters them over a wide range of frequencies. The packets are then re-assembled at the final destination by a chip inside the cellular phone. Reportedly, systems using CDMA technology would offer 10 to 20 times the capacity of present analog systems. CDMA is one of the two digital technologies which will provide the foundation for technical standards used by the U.S. cellular communications industry (see also TDMA). Common Carrier Carriers are companies that provide communication circuits. Common Carriers are regulated service providers for the general public (e.g., local phone companies, AT&T, Sprint, MCI, etc.). In contrast, private carriers are not regulated and provide services to private entities. All types of carriers are significant consumers of telecommunications network equipment. Competitive Access Provider (CAP) A CAP is a company that bypasses local telephone companies by providing a direct link between its switching office and business customers. Bypassing local carriers may reduce costs for long distance providers or result in faster service. Providers of these services include Teleport Communications Group and Metropolitan Fiber Systems. CAPs are important customers for network equipment manufacturers. Computer Telephone Integration (CTI) CTI involves the connection of a computer to a telephone switch so that calls can be intelligently routed. CTI systems often are used by phone banks that want to direct certain types of callers or customers to particular phone agents. Demand is growing for systems, such as these, that increase productivity and efficiency. Cordless Telephone This is a telephone set that has no cord between the handset and the base of the phone. The base is connected to the wireline network and communicates with the handset via radio transmitter, receiver, and antenna. The large U.S. consumer market for cordless phones is served primarily by imports.

Customer Premises Equipment (CPE) CPE refers to telecommunications products that are connected to the network at the customer's location. Included in this category are telephone sets (both wireline and wireless), key systems, private branch exchanges (PBXs), and modems. More recently, products such as facsimile machines, answering machines, and voice response and voice messaging systems have been included in this category. Aside from a few of the more technically advanced products (e.g., voice messaging systems), the United States imports a significant portion of its CPE.

Digital Transmission Digital transmission is the use of binary code (ones and zeros) to encode information, rather than a continuously varying wave (as in analog transmission). Compared to analog transmission, digital transmission creates less distortion of a signal over long distances. In cellular communications, companies are moving toward digital transmission for increased capacity and sound quality (see also analog transmission).

C-3. Facsimile Machine (Fax) A machine which allows written, typed, or drawn material to be transmitted and received across communications networks. There is a significant consumer market in the United States for fax machines, but almost all production of this commodity product is carried out overseas. Federal Communications Commission (FCC) Established by the Communications Act of 1934, the FCC regulates all interstate communications originating in the United States. It plays an important role in wireless communications because it is responsible for providing licenses and allocating spectrum. Global System for Mobile Communications (GSM) The pan-European digital cellular system standard. Independent Service Providers A company providing telephone service that is not affiliated with any of the "Bell" telephone companies. The estimated 1,400 independent phone companies serving the U.S. market are important consumers of telecommunications equipment. Integrated Services Digital Networks (ISDN) ISON networks have been proposed as a means of providing efficient transmission of voice, data, and video. The concept suggests end-to-end digital transmission circuits with significantly more bandwidth than current networks. Although steps have been taken to implement this system, the high cost of ISON terminal equipment and central office ISON hardware and software has prohibited widespread adoption. Key Systems This equipment allows several phone lines to feed into one telephone set. The telephone set has multiple buttons, allowing the user to select lines for outgoing or incoming calls. Key systems are similar to PBXs, though they are often smaller and cannot switch calls from one line to another. Metropolitan Statistical Area (MSA) The FCC divided the U.S. cellular communications market into 306 MS As and 428 Rural Service Areas (RSA). Two cellular carriers were offered operating licenses in each MSA and RSA. Microcell A smaller version of the cells that comprise today's cellular phone service areas. Microcells can vary in size but, unlike regular cells that can be up to several miles in diameter, microcells generally are only several hundred yards in diameter. Microcells are the key component behind proposed networks for personal communications services. They will utilize low-power transmitters and smaller, lighter portable phones. Modulator/demodulator (MODEM) A device that allows communications between computers by converting digital pulses into analog telephone line frequencies and then back into digital pulses for the receiving computer. Modems are popular among those who wish to communicate with other computer users not located in the same building, e.g., people who telecommute from home. Modified Final Judgment (MFJ) A 1982 settlement between the U.S. Department of Justice and AT&T. The MFJ was designed to separate the "competitive" long distance marketplace from the "noncompetitive" local marketplace. Effective January 1, 1984, it removed local telephone service operations from AT&T and grouped the operators into seven Regional Bell holding companies (RHCs). AT&T maintained Western Electric, Bell Labs, and its long distance services. The seven RHCs (Ameritech, Bell

C-4 Atlantic, BellSouth, Nynex, Pacific Telesis, Southwestern Bell, and U.S. West) were limited to providing local services. They were specifically prohibited from manufacturing equipment, providing long distance services outside of their local area. and providing enhanced services. The prohibition on the provision of enhanced services was later lifted, and legislation that calls for significant revision of MFJ restrictions has been discussed in the U.S. Congress. Multimedia Multimedia is the communication of infonnation through the combination of multiple types of media, including audio, video, text, telephony, and graphics. Digital technology enables the convergence of these media, reportedly creating richer and more effective communication than a single media. Demand for multimedia applications is creating demand for all types of telecommunications equipment, especially network equipment capable of transmitting data, voice, and video. Multiplexers Equipment that enables the transmission of more than one signal over one communications circuit at the same time. Tl and T3 multiplexers are used for high-speed digital transmission. The market for this type of equipment is expanding as demand for high capacity networks increases. Narrowband PCS See Personal Communications Services. Network Equipment For wireline networks, equipment includes switches, copper cables, fiber optic cable, and line equipment (e.g., multiplexers and repeaters). For wireless networks, equipment includes cellular switches, satellites, and cell site equipment The United States is highly competitive in the manufacture of network equipment. Personal Communications Service (PCS) Two-way wireless communications using low-powered handsets, typically within microcells. It is expected to be offered in several developed country markets in the 2 Gigahertz (GHz) band. Narrowband PCS refers to two-way paging devices, while broadband PCS will consist of a cellular-like service, but with smaller and reportedly cheaper handsets. The FCC is auctioning off licenses for these services during 1994. Private Branch Exchange (PBX) A PBX is a private telephone switching system, generally located on the customer's premises. It connects the many individual phones in a building to a group of outgoing telephone lines. PBXs have improved over the years from basic switching devices to open architecture computers with a wide range of features, including call forwarding, intercom, and call transfer. They are in direct competition with the Centrex services offered by the BOCs. Advantages to a PBX over Centrex include individual ownership and increased flexibility (see also Centrex). Regional Bell Holding Companies (RHCs) The seven local telephone service companies divested by AT&T on January l, 1984. TheRHCsandtheir220perating Companies (BOCs) were banned from manufacturing equipment as a result of the Modified Final Judgment Today the BOCs believe that some of the MFJ restrictions, particularly the manufacturing ban, are outdated and should be lifted (see also Modified Final Judgment). Private Network Privately owned switching and transmission facilities that operate over leased and non-leased lines, usually connecting a series of offices.

C-5 Post Telephone and Telegraph (PTT) PlTs refer to the telephone service providers in most foreign countries. They are usually controlled by their governments and often have agreements with national equipment suppliers. As some of these providers are privatized, however, opportunities for foreign providers of telecommunications equipment increase.

Repeaters A device that is used to boost and amplify analog signals as they travel along a circuit. Repeaters are also used to regenerate digital signals. As networks expand in size, many repeaters are needed to ensure clear transmission of signals. Radio Spectrum The range of frequencies extending from IO kilohertz (kHz) to 300 GHz. These frequencies are located below those of visible light and above those of audible sound. Spectrum is a non-depletable, finite, natural resource that is utilized by wireless communications providers. Software Instructions that tell a computer what to do. Software is a primary component in most high-end telecommunications equipment, enabling intelligent network systems. Software is responsible for an estimated 70 percent of the total cost of a switch. Switches A device that routes signals through the network by opening and closing circuits. Expanded use of software in switches in recent years has increased the types of features offered. Central office (CO) switches handle calls on the wireline network. Cellular switches transfer calls between the wireline network and the wireless (or mobile) networks. ATM switches are among the newest products on the market and will be used for switching voice, data, and video traveling along the same circuit. Terminal Equipment See Customer Premises Equipment. Time Division Multiple Access (TDMA) A digital cellular transmission technology that divides discrete amounts of time on a radio frequency into parts, and then assigns different phone conversations to each part. Reportedly, a system using TOMA technology would offer three times the capacity of present analog systems. TOMA is one of two digital technologies which will provide the foundation for technical standards used by the U.S. cellular communications industry (see also CDMA). Value-added reseller (VAR) VARs are businesses that combine hardware products with software solutions for specific industries. Traditionally vendors of data communications equipment, VARs increasingly distribute voice communications equipment in order to be able to offer customers complete information systems.

Voice Messaging Systems Systems that allow voice messages to be stored, played back, and distributed. There are many levels of voice message and voice mail systems, from stand-alone versions to integrated systems. These systems are considered high-end CPE and are produced by a number ofniche firms. Voice Response Systems Also called Interactive Voice Response Units, these systems allow callers to route their calls. A pre-recorded voice offers various menu options, then the caller selects a destination using his/her push button phone. These systems are considered high-end CPE and are produced by a number of niche firms.

C-6 Wireless Networks Any communications system that operates without wires. In the U.S. market, it generally refers to cellular networks, wireless office systems, PCS, and paging. The international market for wireless networks is increasing rapidly. In countries where wireline infrastructures are outdated or inadequate, consumers are turning almost exclusively to wireless systems.

Wireline Networks Any communication system that operates across wires, including copper, coaxial, and fiber optic cables. Basic telephone service in the United States operates over a wireline network, though an increasing number of consumers are supplementing wireline service with some type of wireless system.

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